i

Measuring theEfficiency of Indian IT Industry: DEA

Analysis
Submitted to Lovely Professional University
In partial fulfilment of therequirements for theaward of degreeof
MASTER OF BUSINESS ADMINISTRATION

Submitted by:
Harvinder Verma
Reg. No7460070069
Inderjeet Singh
Reg. No7460070072
Mnadeep Singh
Reg. No7460070079
Supervisor:
Name of the Faculty Advisor
Sukwinder Kaur
DEPARTMENT OF MANAGEMENT
LOVELY PROFESSIONAL UNIVERSITY
PHAGWARA
(2007-2012)
ii
CERTIFICATION/THESIS APPROVAL BY FACULTY ADVISOR
TO WHOMSOEVER IT MAY CONCERN
This is to certify that the project report titled Measuring the Efficiency of Indian IT
Industry: DEA Analysis carried out by Harvinder Verma, Inderjeet Singh and
Mandeep Bhullar, have accomplished under my guidance & supervisionas a duly registered
MBA student of the Lovely Professional University, Phagwara. This project is being
submitted by him/her in the partial fulfilment of the requirements for the award of the Master
of Business Administration from Lovely Professional University.
Their dissertation represents their original work and are worthy of consideration for the
award of the degree of Master of Business Administration.
Sukhwinder Kaur
(Name & Signature of the Faculty Advisor)
Date: 26/04/2012
iii
DECLARATION OF AUTHENTICITY BY STUDENT
DECLARATION
I, Harvinder Verma, hereby declare that the work presented herein is genuine work done
originally by meand has not been published or submitted elsewhere for the requirement of a
degree programme. Any literature, data or works done by others and cited within this
dissertation has been given due acknowledgement and listed in the reference section.
Harvinder Verma
(Student's name & Signature)
7460070069
(Registration No.)
Date: 26/04/2012
iv
DECLARATION OF AUTHENTICITY BY STUDENT
DECLARATION
I, Inderjeet Singh, hereby declare that the work presented herein is genuine work done
originally by meand has not been published or submitted elsewhere for the requirement of a
degree programme. Any literature, data or works done by others and cited within this
dissertation has been given due acknowledgement and listed in the reference section.
Inderjeet Singh
(Student's name & Signature)
7460070072
(Registration No.)
Date: 26/04/2012
v
DECLARATION OF AUTHENTICITY BY STUDENT
DECLARATION
I, Mandeep Singh, hereby declare that the work presented herein is genuine work done
originally by meand has not been published or submitted elsewhere for the requirement of a
degree programme. Any literature, data or works done by others and cited within this
dissertation has been given due acknowledgement and listed in the reference section.
Mandeep Singh
(Student's name & Signature)
7460070079
(Registration No.)
Date: 26/04/2012
vi
Table of Contents
Serial No. Topic Page no.
1. Executive Summary 1-2
2. Introduction 3-4
3. Literature Review 5-10
4. Need, Scope and Objectives 11-12
4.1. Need 12
4.2. Scope of the stody 12
4.3. Objectives 12
5. Research Methodology 13-15
5.1. Research design 14
5.2. Sampling Technique 14
5.3. Sample Size 14-15
6. Data Collection 16-17
7. DEA Approach 18-26
7.1. DEA Technique 19
7.2. DEA Analysis 20-26
8. Risk Factors 27-31
9. Result 32-33
vii
10. Conclusion 34-35
11. Recommendations 36-37
12. References 38-41
13 Appendix 42-55

1
CHAPTER - I
EXECUTIVE SUMMARY
2
1. Executive summary
In the current global scenario, stock markets are tumbling down, investors are incurring losses
and industrial growth is slowing down. In spite of this fact, Indian IT industry is reporting anet
profit. In this study we will be calculating the efficiency of Indian IT industry with the help of DEA
analysis. The efficiency of the industry can also be calculated with the help of ratio analysis but
DEA is better tool and gives more accurate information about the efficiency of the companies. In
DEA, we are taking sample size of 10 IT companies in India which are major key players driving
the growth of IT industry. While applying DEA, we chose 10 DMUs which are TCS, Infosys
technologies, Wipro, HCL, Cognizant technologies, SAP India, Oracle, Tech Mahindra, Cisco and
Redington. The DEA showed HCL tops the list of the efficient IT companies and the efficient
frontier consisted of TCS, Infosys technologies, HCL, Redington, Cisco, SAP India, Tech Mahindra.
Oracle, Wipro and Cognizant were not lying on the efficient frontier. This study also analysed
various environmental factors which affect the IT companies. Through the secondary studyof
annual reports, we find that all these companies considered the effect of economic conditions
of the country and exchange rate fluctuations most important which can have adverse effect on
the financials of the companies. To overcome the effect of foreign exchange fluctuations risk,
we recommend that companies can hedge the risk using forward market hedge, money market
hedge and options market hedge.
3
CHAPTER - II
INTRODUCTION
4
2. Introduction
Indian IT industry is well known for cost effectiveness. The Indian information
technology (IT) industry has played a major role in placing India on the international
map. The industry is mainly governed by IT software and facilities for instance System
Integration, Software experiments, Custom Application Development and Maintenance
(CADM), network services and IT Solutions. (Mathur 2010)
1
The present study intends to analyze the performance of the Indian IT industry by
working out the technical efficiency of the software and the telecommunication firms
using the mathematical model of data envelopment analyses (DEA). The study also
proposes to examines the impact of various determinants on technical efficiency of the
software firms and net exports across IT firms further, examines the determinants for
new technology adoption by telecommunication industry because the success of the
software firms in terms of its exports is intertwined with the performance of the
telecommunication industry. The study will quantify the changes needed in the relatively
good Indian it environment and the readiness indices to increase the usage among
individuals, businesses and the government.
Efficiency can be framed as operating efficiency (Stiglitz, 1981). Operating efficiency
(Farrell, 1957) denotes whether a firm is cost minimising (consuming less inputs for the
same level of outputs) or profit maximising (producing more outputs for the same amount
of inputs) based on published accounting numbers.
In recent time, Indian IT industry has been consistently working towards the development
of technological changes and its usage in the banking operations for the improvement of
their efficiency. To get the benefits of enhanced technologies, Indian ITes are
continuously encouraging the investment in Research and Development. As a
representative body, the national association of software services companies
(NASSCOM) said recently that the IT industry would grow 13-15 percent in the ensuing
fiscal (2012-13) after crossing the $100 billion mark in this fiscal (2011-12) with exports
accounting for $70 billion. This double digit growth is known to be driven by cost
effectiveness (Mathur 2010) and our paper, in nutshell, will account for various reasons
of this growth.
5
CHAPTER -III
LITERATURE REVIEW
6
Literature review
Grigorian, A. David, Manole Vlad, (2002) used DEA approach to check performance
of commercial banks in transition and used linear programming method to establish
which banks will determine envelopment surface composed of best practice units to be
used in DEA. The results showed that DEA can be successfully applied to banking
systems in transition. They found that privatization of the banks, beyond those involving
transfer of shares to the foreign owners, does not result in statistically significant
improvement in efficiency.
Bukri and Niazi (2003) tested the privatization effect on Pakistans banking cost and
allocation, technical, scale and pure technical efficiency through the DEA approach and
regression analysis of unbalanced panel data over the sample period of 1991 2000. The
result through the DEA approach showed that foreign banks achieved the highest
efficiency level as compared to private and public banks. However in contrast with public
banks, private banks are more efficient.
Beccal Elena, Casu Barbara and Girardone Claudia, (2003) measured the efficiency
and stock performance in European Banking by employing a three-step procedure to
generate the information required for the study. The data comprises of all the publicly
listed banks in France (Bourse de Paris), Germany (Deutsche Brse Group), Italy (Borsa
Italiana Spa), Spain (Bolsa de Madrid) and UK (London Stock Exchange) and data of
stock from 03.01.2000-30.06.2001 had been taken. They found that the overall efficiency
scores range between 70% and 90% and during the past decades, competitive pressures
have increasingly driven banks to change their strategic focus on generating returns to
shareholders.
Al-Tamimi Hussein A. Hassan (2003) analyses the use of the data envelopment analysis
(DEA) in the performance measurement of UAE commercial banks along with some
traditional measures namely ROE, ROA, loans to deposits, and loans to total assets
during the period 1997-2001. The main findings of the study are (i) Most of the UAE
commercial banks appear inefficient when DEA is used. (ii) It was found that the national
banks were more efficient than the foreign banks. This might be attributed to the fact that
7
most the ownership of these banks are belong government bodies, therefore, they have
more facilities and they are facing less restrictions in managing their operations; (iii) two
traditional ratios namely, loans to deposits, and loans to total assets indicate that the UAE
commercial banks to some extent did not use the available resources properly. This
suggests that there was an excess liquidity and therefore the UAE commercial banks
require to develop new strategies in order to utilise the available resources.
Feroz EH, Kim S, Raab RL, (2003) analysed the financial statements with the help of
DEA approach taking a sample of three unrelated industries to test the null hypothesis
that there is no relationship between DEA and traditional accounting ratios as measures
of performance of firm. The results showed that DEA can supplement the traditional ratio
analysis and it provides additional information than that providedby ratio analysis.
Galagedera U.A. Don, Edirisuriya Piyadasa, (2004) measured the performance of
Indian commercial banks(1995-2002) by application of DEA and Malmquist productive
index. The authors have used total deposits and operating expenses as input and loans and
other earning assets as output in the DEA analysis. The results showed that overall
efficiency of Indian commercial banks was 0.92 and managerial efficiency was 0.96.
They also found that managerial efficiency of public sector banks however is higher than
private sector counterparts and also observed no significant growth in productivity during
the sampled period.
Bosetti Valentina, Cassinelli Mariaester and Lanza Alessandro (2004) analyze the
performances of tourism management of local governments when economic and
environmental aspects are considered as equally relevant. It was found that DEA analysis
produces relative efficiency indices for each considered municipality and also gives
useful information concerning which lever should be moreeffective in order to move to
higher levels of efficiency. Data Envelopment Analysis can be effectively applied in
assessing economic and environmental performances of tourism management. This can
be even more useful for countries where the tourism industry has both increasing
economic relevance and a growing impact on the environment.
Saranga Haritha and Phani B.V., (2006) measured the internal efficiencies of the
Indian pharmaceutical industry using a sample of 44 Pharma companies and applying
8
DEA approach. The results showed that size of a company does not dictate the internal
efficiency ratings; however indigenous firms, which are in the business of both Bulk and
Formulations, have an edge over MNCs and firms with only Formulations business.
Feroz, H. Ehsan, Goel, Sanjay and Raab, L. Raymond(2006) analyze the
pharmaceutical industry, which includes many multinational corporations with complex
governance problems, over ten recent years, and the strategies that allowed firm
efficiency rankings to improve or worsen over time are highlighted. Their analyses
indicate that the inclines and declines in DEA efficiency rankings are related to the
strategic choices made by the upper management, thereby lending credibility to the use of
these rankings in performance measurement by the board of directors. The main findings
of the approach are that it overcomes some of the difficult issues faced by the board of
directors in comparing performance of the management to the best case scenario within
the same industry
Kuosmanen Timo and Kortelainen Mika(2006) developed a new approach for
environmental valuation within Environmental cost-benefit analysis (ECBA) framework
that is based on data envelopment analysis (DEA) and does not demand any price
estimation for environmental impacts .It measures environmental costs in terms of
absolute rather than relative shadow prices.
Pasiouras, Fotiossifodaskalaki, Emmanouil and Zopounidis, Constantin (2007)
follow a two-stage procedure to examine for the first time the cost efficiency of Greek
cooperative banks. They used data envelopment analysis (DEA) to estimate the technical,
allocate and cost efficiency for each bank in sample. Then, Tobit regression is used to
determine the impact of internal and external factors on banks efficiency. The results of
DEA indicate that Greek cooperative banks could improve their cost efficiency by 17.7%
on average as well as that the dominant source of cost inefficiency is distributive rather
than technical.
Zhu Joe (2008) study the performance of airline industry in 2007 and 2008 . It was found
that DEA model was able to evaluate the performance with respect to its fleet operation
efficiency and performance on passenger revenue generation.
9
FAllon Cayon Edgardo and Sabogal Sarmeinto Julio (2009) measured relative
efficiencies in the shoe industry sector in Columbia. They analyzed financial data from
75 companies of the Columbian shoe industry to determine which factor among cost of
capital, net operational profits after tax or invested capital in the firm, are more important
in maximizing the EVA of the firm. They found that invested capital was important
factor in making the EVA positive for the firm for the years 2006-07 and Net operational
profits after tax was main factor for the years 2005-04. They also found that DEA can be
used to measure the relative performance specific firms that operate in the common
economic sectors.
Babalos Vassilios, Caporale,MariaGuglielmo and Philippas Nikolas (2009) evaluated
and assessed relative performance of Greek Equity funds using DEA. They studied the
effect of cost and operational attributes on the operational efficiency of funds and used
risk-adjusted returns, J enson alpha and Carhart as the output variables. They found that
there is negative relationship between fund performance and assets under management.
For this result they said that structure of the domestic market may be reason for this
negative relationship.
Dash Mihir, Charles Christable, (2009) studied technical efficiency of banks in India
and determined tight inputs and outputs for the banks using DEA model. The authors
took sample of 49 major banks operating in India, of which 20 were public sector banks,
19 were private sector banks and 10 were foreign banks. Further in DEA model five input
variables namely, borrowing, deposits, fixed assets, net worth and operating expenses,
and four output variables namely, advances & loans, investments, net interest income and
non-interest income were used. They found that foreign banks were more efficient that
public and private banks and that there was not much difference between efficiency of
public and private banks. Further, they found that there were some significant differences
in terms of utilization of inputs and under-production of outputs.
Tripathy Ishita, Yadav Surendra and Sharma Seema, (2009) measured the Efficiency
of pharmaceutical firms in India using a two stage DEA framework and data of about 300
large pharamaceutical firms. The results showed that the performance of a large number
10
of sample firms was sub-optimal, ranging between 68% and 78% and these firms need to
reduce their inputs to attain a given level of output to become efficient.
Rajput Namita and Gupta Monika, (2011) assesed the efficiency and profitability of
Indian commercial banks and analysed the role of Information Technology and its
relevancy in Indian banks in the recent era using the data of 86 banks and applying DEA
approach. They found that there is an increasing trend in performance of Indian banks
caused by IT innovation and enlarged investment in new information technology during
the recent time period (2005-06 to 2009-10).
11
CHAPTER IV
NEED, SCOPE AND OBJECTIVES
12
4.1. Need
In the present scenario as the global market is tumbling at greater pace but still Indian IT
sector is performing relatively well. For instance, Infosys managed to earn good net
profits even when the stock indices was having bearish run (Infosys results: Q2 net profit
at Rs 1906 cr for FY 2011, up 11%). Moreover, (NASSCOM) said recently that the IT
industry would grow 13-15 percent in the ensuing fiscal (2012-13) after crossing the
$100 billion mark in this fiscal (2011-12) with exports accounting for $70 billion. So a
need arises to know the various factors which integrates together to drive the growth of
Indian IT industry.
4.2. Scope of the study
The study will take into consideration major IT sectors players with revenue for FY 2011
more than Rs. 4000 crores and double digit growth. So our study will be limited to these
companies which reflect the ongoing trend in the Indian IT industry. All the companies
are not domestic IT industries, some of them like Accenture India which is international
player, has also been taken into consideration. All the companies are registered in India
but some of them are not listed in India. So it will not be a level playing field in terms of
investment made or location from which funds are raised. So our scope is not limited
only to domestic players. Further, SMES of IT industries are not taken into research
because our criterion is more than 4000 crores..
4.3. Objectives
To measure the efficiency of Indian IT sector.
To study the various factors affecting the efficiency of IT industry in India.
13
CHAPTER-IV
RESEARCH METHODOLOGY
14
Research Methodology
3.1 Research Design
In our research we undertake descriptive research design. Our first objective is to find
efficiency of IT companies and then to find various factors affecting it. So we know our
underlying problem (to calculate efficiency), and solution will be provided by descriptive
research.
3.2 Sampling technique
Sampling technique used is non probability type judgemental sampling. A criterion is
listed down and companies areselected from that based on our judgement. Based on our
criteria, top IT Companies with minimum revenue for FY 2011 to be Rs. 4000 Cr and
double digit growth (i.e. 10% or more) in revenue from FY 2010 to FY 2011 are selected.
Out of the total registered companies in India, only seventeen companies (see appendix 1)
meets the above criterion. The top 20 companies have contributed over 64 per cent to the
combined revenue, according to a study by CyberMedia's Dataquest Research. So this
sample represents considerable market share.
3.3 Sample size
Seventeen IT companies have been taken as a sample size based on above mentioned
criterion. List is given below (*see appendix 1):
Company Name and Rank*
1. Tata Consultancy services (TCS)
2. Infosys technologies
3. Wipro
4. Cognizant technology solutions
5. HCL technologies
15
6. Redington India
7. Cisco Systems India
8. OracleIndia
9. Accenture india
10. Tech mahindra
16
CHAPTER V
DATA COLLECTION
17
Data collection
Data is collected from secondary sources like web sites related to IT industry, company
finances (moneycontrol.com) and also from various case studies and articles (Nasscom
stats). Financial data will be collected for a period of past 2 years (FY 2010-FY2011).
First source will be companies own websites. For financial data, audited annual reports
will be taken from rediff money, money control, BSE etc. Analysis of the data will be
based upon DEA technique.
After choosing sample size, the most significant task is to define the input and output
variable for analysis and data to be collected for it. There is a tradeoff to be made
between number of variables and accuracy. In nutshell, DEA approach should not use
more than five variables per firm in Input oriented analysis. Five variables should as a
whole should represent whole cost and inputs which can have effect on output. Following
five variables are used (see appendix 2)
X
i
=Input variables
X1 = No. of employees: proxy for skilled manpower, manpower expenses and
investment in human resource
X2 =Total Assets: A direct input to produce output, proxy for size of firm.
X3=Total operating expenses: cost analysis for producing outcome
Y1 =output variable =Total Sales revenue
(See appendix)
18
CHAPTER VI
DEA APPROACH
19
5.1 Analysis technique DEA Approach
DEA is a linear programming model used to measure technical efficiency. It comes up
with a single scalar value as a measure of efficiency. Efficiency of any firm can be
defined in terms of either output maximization for a set of inputs or input minimization
for a given output. In DEA, relative efficiencies of a set of decision-making units
(DMUs) are calculated. Each DMU is assigned the highest possible efficiency score by
optimally weighing the inputs and outputs. DEA constructs an efficient frontier
composed of those firms that consume as little input as possible while producing as much
output as possible. Those firms that comprise the frontier are efficient, while those firms
below the efficient frontier are inefficient.
Data envelopment analysis offers several characteristics that are quite unique and useful
in comparison to traditional financial analysis methods like ratio analysis or regression
analysis. Although all these techniques have their own advantages and disadvantages, one
of the most important feature of DEA is the ability to compare many parameters
simultaneously and come up with a scalar measure of overall performance. DEA provides
the relative efficiency of each of the firms (which usually are called Decision Making
Units (DMUs)) in a given set of firms. These DMUs are assumed to be in the business of
producing various outputs by consuming a set of inputs. In general several inputs are
required to produce one or more outputs for a DMU. However, in DEA only a few inputs
and outputs are chosen depending on how critical their contribution is to the effective
performance of the DMU, in order not to dilute the efficiency analysis with too many
parameters. The selection of inputs and outputs is of paramount importance in any DEA
calculations as the results of the study can vary with different sets of inputs and outputs.
They vary from industry to industry, and even within the industry depending on the
objective of the efficiency analysis being carried out. It always helps to begin with 2-3
Inputs (outputs) and slowly build up the number noting down the effect of each additional
input (output) on the efficiency scores.
20
5.2 DEA Analysis of the above data
For the Data Envelopment Analysis we are defining three input variables and two output
variables.
The input variables are operating expenses, total assets and number of employees. The
output variables are net profits and total sales revenues. The efficiency will be measured
by DEA technique and the software used is EMS- efficiency measurement system. In
order to calculate the efficiency we have used the input oriented measure which
quantifies the input reduction which is necessary to becomeefficient holding the outputs
constant.
The first column is the DMU- Decision Making Units which in our study are the IT
companies we have chosen on the basis of our judgment. The second column tells the
efficiency score of the DMUs calculated by the software. Of all the DMUs, HCL tops the
list and the efficiency score is 184.87 %. Out of 10 DMUs, the 7 of these have the
efficiency score above 100% which makes the efficient frontier. This means that these 7
companies are utilizing the input resources to the best of their use and they act as
benchmark for the inefficient DMUs.
21
Here, it can be seen that all the values above 100 constitute the efficient frontier. The
inefficient DMUs are Wipro, Cognizant and Oracle. These have values 93.38, 81.61 and
88.22 respectively. All the inefficient DMUs are, without any second thoughts, lacking
somewhere in utilizing their resources efficiently as compared to all other DMUs that are
lying on efficient frontier. Wipro, Cognizant and Oracle, all these must follow the
efficient ones.
The Benchmarks column shows which efficient DMUs must be followed by the
inefficient DMUs. In the row for the Wipro, the value for the benchmarks is 1(0.14)
2(0.10) 5(0.88) 7(0.04). This means that TCS, Infosys, HCL and Cisco act as benchmarks
for the Wipro. Similarly, for Cognizant, TCS, Infosys, HCL and Cisco are the
benchmarks. Infosys, Wipro andSAP India act as benchmarks for the Oracle.
Out of all the input and output variables taken into account, the columns following the
benchmark column describes what variables are important for the companies and must be
improved upon by the inefficient DMUs, so that they lie on the efficient frontier. For
Wipro, the value in the column of net profits is 0.03, which means that it must increase its
net profits by at least 3 percent to qualify for the efficient frontier. But at the same time,
22
for Cognizant Technologies all the values are zero. Thismeans that improvement in none
of these factors (which have been taken into consideration namely, net profits, total sales
revenue, operating expenses, number of employees and total assets) can lead the
cognizant to qualify for the efficient frontier. Whereas, oracle is lacking by a great extent
because the values for its total sales revenues shows that oracle must increase its sales
revenues by 86 percent to catch up with Infosys, Cisco and SAP India.
23
Output oriented Measure
An output oriented measure quantifies the necessary output expansion holding the inputs
constant. The second column tells the efficiency score of the DMUs calculated by the
software. But in the output oriented measure the DMU with the lowest efficient score will
be considered as the most efficient. Of all the DMUs, HCL tops the list and the efficiency
score is 54.09 %. Out of 10 DMUs, the 7 of these have the efficiency score below 100%
which makes the efficient frontier. This means that these 7 companies are utilizing the
input resources to the best of their use and they act as benchmark for the inefficient
DMUs.

24
Here, it can be seen that all the values below 100 constitute the efficient frontier. The
inefficient DMUs are Wipro, Cognizant and Oracle. These have values 107.09, 122.54
and 113.36 respectively. Wipro, Cognizant and Oracle, all these must follow the efficient
ones.
The Benchmarks column shows which efficient DMUs must be followed by the
inefficient DMUs. In the row for the Wipro, the value for the benchmarks is 1(0.15)
2(0.11) 5(0.94) 7(0.04). This means that TCS, Infosys, HCL and Cisco act as benchmarks
for the Wipro. Similarly, for Cognizant, TCS, Infosys, HCL and Cisco are the
benchmarks. Infosys, Wipro and SAP India act as benchmarks for the Oracle.
25
Non Oriented Measure:
A non-oriented measurequantifies necessary improvements when both inputs and outputs
can be improved simultaneously. Again in the non-oriented measure, of all the DMUs,
HCL tops the list and the efficiency score is -29.79 %. Out of 10 DMUs, the 7 of these
have the efficiency score below 0 which makes the efficient frontier. This means that
these 7 companies are utilizing the input resources to the best of their use and they act as
benchmark for the inefficient DMUs.
26
Here, it can be seen that all the values below 0 constitute the efficient frontier. The
inefficient DMUs are Wipro, Cognizant and Oracle. These have values 3.42, 10.13 and
6.26respectively.
27
CHAPTER VII
RISK FACTORS
28
Risk Factors
From the study of annual reports we found that the important risk factors to the
companies are:
General economic conditions
Fluctuations in currency exchange rates and related impacts to our operating results
Natural disasters, like the recent earthquake
Regulatory changes;
Political unrest
Terrorism
Demand
Business Disruption
29
Terrorist acts, conflicts or wars (wherever located around the world) may cause damage
or disruption to any company which adversely affects the employees, partners, suppliers,
distributors, resellers or customers of the company, to manage logistics, operate
transportation and communication systems and other critical business operations. The
potential for future attacks, the national and international responses to attacks or
perceived threats to national security, have created many economic and political
uncertainties. Terrorist acts, conflicts, wars may seriously harm any business revenue,
costs and expenses and financial condition and stock priceof it.
Macroeconomic developments like the recent recessions in the U.S. and Europe and the
debt crisis in certain countries in the European Union could negatively affect business,
operating results or financial condition which, in turn, could adversely affect on stock
price, net profit and revenue.The fluctuation in the Indian economy could cause current
or potential customers to reduce their information technology (IT) budgets or to be
unable to fund software, hardware systems or services purchases, which could cause
customers to delay, decrease or cancel purchases of the products and services and can
cause customers not able to pay for the product and services and results in delay of
payments for previously purchased products and services.
In addition, political unrest in regions, terrorist attacks, and natural disasters, including
the earthquake and resulting tsunami in J apan, continue to contribute to a climate of
economic and political uncertainty that could adversely affect the results of operations
and financial condition, including therevenue growth and net profitability. These factors
generally have the strongest effect on the sales of new software licenses, hardware
systems products, hardware systems support and related services and, to a lesser extent,
also may affect on therenewal rates for software license updates and product support.
The exchange rate between the Indian rupee and the Britishpound and the rupee and the
U.S. dollar has fluctuatedwidely inlast year and may continue to fluctuate significantly
in the future. The average value of the rupee as on March 31, 2011 against the British
pound appreciated by approx 7% and against U.S. dollar by approx 4% over March 31,
2010. Accordingly, operating results have been and will continue to be impacted by
fluctuations in the exchangerate between the Indian rupee and the British pound andthe
30
Indian rupee and the U.S. dollar, as well as exchangerates with other foreign currencies.
Any strengthening of theIndian rupee against the British pound, the U.S. dollar or other
foreign currencies, as witnessed in the last year, couldadversely affect the profitability of
the company.
Where
1- Risk of the change in the Economic conditions of the country among the companies
2-Risk of the change in the Political condition among the companies
3- Risk of Demand
4- Risk of Exchange rate fluctuation
5-Risk of Business Disruption among the companies
6- Risk of the Natural Disasters
7- Risk of Terrorism among the companies
31
This figure demonstrates that risks to the IT industry. This paper will focus the attention
only to 10 IT companies, and from the figure it is clear that the major risk felt by the
companies is about the change in the economic condition of the country and the exchange
rate fluctuations. Whereas the risk of the forecasted demand is taken into consideration
only by 70 percent of the companies and taking into consideration the recent tsunami in
J apan, 50 percent of companies do feel that they face risk from the natural disasters
which are not in their control and can happen anytime
32
CHAPTER-VIII
RESULT
33
RESULT
The main objective of this study is to calculate the efficiency of Indian IT industry, for
which we considered the 10 IT companies in India which are major drivers of the growth.
DEA analysis showed that HCL is the leader in IT industry followed by Cisco, TCS and
then Infosys technologies. Out of all the DMUs taken into the sample, 7 DMUs were
performing efficiently and 3 DMUs namely Oracle, Cognizant Technologies and Wipro
are lacking in the race of becoming the benchmark in IT industry. In spite of the fact that
Oracle is reporting a net growth of 32 percent in its total revenues, it is standing on the
position 9 in the table of efficient IT companies. This might be primarily due to reason
that it has not been focusing on its operating expenses as compared to other efficient
DMUs. Or it might be the case that the efficient DMUs who tops the list, are utilizing
their total assets as well as total number of employees really well. The topmost position is
held by HCL which clearly shows that it has been able to utilize its total assets well or it
may be incurring fewer expenses on its operations to achieve better revenues.
Another objective was to find the environmental factors which are not in the control and
having the effect on the functioning of the IT industry. Secondary study of the data
showed that almost all the companies consider effect of the economic conditions of the
country and foreign exchange rate fluctuations most important among other risks faced
by the industry. The depreciating Indian rupees, recession in Europe, dampening growth
of Indian industry are the reasons behind this behavior of the companies. Another risk
which is common to all the companies is the risk of demand. Demand is something which
cannot be forecasted correctly, and inaccurate forecast of the demand makes companies
feel that it is risk to the company.
34
CHAPTER- IX
CONCLUSION
35
CONCLUSION
From the above discussion of the results showed by data envelopment analysis, we
conclude that majority of IT companies in India are operating efficiently. Exception to
this are the 3 big companies namely oracle, cognizant technologies and Wipro. HCL tops
the list of the most efficient IT companies in India. The major environmental factors
which can adversely affect the financials of the company and its operations are the
economy conditions of the country and the exchange rate fluctuations. Almost all the
companies feel that these two factors pose a great risk to them. After this study a direct
implication can be for the investors who can invest into the most efficient IT companies.
In the most efficient IT sector an investor should consider to invest into HCL, TCS,
Infosys and other such companies lying on efficient frontier. These companies are
operating efficiently as compared to other peer companies and therefore will give more
return with less risk.
36
CHAPTER-X
RECOMMENDATIONS
37
Recommendations
In this study, we found out that oracle, Cognizant technologies and Wipro are lacking
behind in the race of the most efficient company in the IT industry. DEA showed that
oracle needs to improve its total revenues to become the efficient player in the market
whereas Wipro can lie on the efficient frontier if it is able to increase its net profits by 0.3
percent. The major environmental risks posed by these companies are economic
conditions of the country and exchange rate fluctuations. Out of these two factors,
exchange rate risks can be controlled to some extent by these companies by using optimal
hedging tools to reduce the risk like forward market hedge, money market hedge and
options market hedge.
38
CHAPTER- XI
REFERENCES
39
References:
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41
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42
CHAPTER XII
APPENDICES
43
Appendix 1:
Table is drawn for the companies with revenue for FY 2011 more than 4000 crores INR
and double digit growth. All the companies are not included here as companies are
selected based upon judgement. Ranking has been done based upon revenue in FY 2011.
Company Name and
Rank
Revenue FY 2010
(INR in crores)
Revenue FY 2011
(INR in crores)
Revenue Growth
(% per annum)
1. Tata Consultancy
services (TCS)
Rs. 30028 Rs.37325 24.3%
2. Infosys
technologies
Rs. 22742 Rs. 27501 20.92%
3. Wipro Rs. 27157 Rs. 31098 14.5%
4.Cognizant
technology solutions
Rs. 22961 Rs. 30605 30.93%
5. HCL technologies Rs. 12290 Rs. 16030 30.43%
6. Redington India Rs. 13770 Rs. 17478 26.93%
7. Cisco Systems
India
Rs. 160066 Rs. 216090 35%
8. Oracle India Rs. 13400 Rs. 178110 32.97%
9. SAP India Rs. 83508 Rs. 95361 14.19%
10. Tech Mahindra Rs. 4574 Rs. 5140 11.06%
Source: annual reports of respective companies
The top 20 companies have contributed over 64 per cent to the combined revenue,
according to a study by CyberMedia's Dataquest Research. So this sample represents
considerable market share.
44
Appendix 2:
Descriptive Input/output parameters table:
Company Name X1(Rs. In
Crores)
X2 (Rs. In
Crores)
X3 Y1 (Rs. In
Crores)
Y2 (Rs. In
Crores)
1. TCS
26,146 14,276 184,603 37,325 9,068
2. Infosys
technologies 11,599 24,677 130,820 27,501 6,835
3. Wipro 21,198 26,065 122,385 31,098 5,292
4. Cognizant tech
solution 24,923 27,539 137,700 30,605 4,418
5. HCL
technologies 13,181 2,238 81,188 16,030 1,646
6. Redington India 17,030 3,120 78,000 17,478 226
7. Cisco Systems
India 80,150 435,475 71,825 216,090 45,165
8. Oracle India 117,945 367,675 108,000 178,110 42,735
9. SAP
62,658 155,607 54,589 95,361 23,041
10.Tech Mahindra
2,092 6,044 38,333 5,140 644
X
i
=Input variables
X3 = No. of employees: proxy for skilled manpower, manpower expenses and
investment in human resource
X2 =Total Assets: A direct input to produce output, proxy for size of firm.
X1=Total operating expenses: cost analysis for producing outcome
45
Yi=output variable
Y1=Total Sales revenue
Y2=Net profit
46
Appendix 3:
Financial statements
TCS
47
48
Tech mahindra:
49
50
Wipro
51
52
Redigton India
53
54
HCL
55