International Business Machines Corp.’s (IBM) India unit, which over the past decade has risen to dominate the domestic technology services market, reported a 20% drop in net profit for the year ended March 2013, weighed down mainly by foreign exchange losses and depreciation in value of investments.
IBM India is also contesting income tax claims amounting to at least Rs.6,857 crore. This includes about Rs.1,500 crore of pending claims, some dating back to 1997-98, according to IBM’s annual report for 2012-13, and a separate tax notice of Rs.5,357 crore in November accusing it of under-reporting profit for the 2009 fiscal year.
The company has separately cleared disputed tax claims amounting to Rs.1,421.8 crore.
IBM’s India revenue for the year ended March 2013 rose 12% to about Rs.19,924 crore (about $3.2 billion), driven mainly by healthy spending from top clients such as Bharti Airtel Ltd, Vodafone India Ltd and Indian Railways.
Profit after tax, however, fell nearly 20% to Rs.1,218.2 crore from Rs.1,520.8 crore in the previous year, IBM said in the documents that were posted on the corporate affairs ministry’s website on 31 December.
“We continue to make significant progress on our 2015 growth initiatives, driving leadership for IBM in the marketplace,” IBM said in its annual report.
In 2012-13, IBM India also detected an instance of fraud by some employees who overstated revenues amounting to Rs.61.1 crore from various customer accounts, according to the documents. The company incurred a loss of Rs.12.9 crore as a result, which it adjusted in its balance sheet, IBM India’s financial auditors said.
Mint first reported in July that IBM had sacked some two dozen employees in India for overstating revenue by at least $8 million to meet financial targets for the year ended March 2009.
In 2013, IBM India executives Ganesh Margabandhu, K. Raghunandan, Kalpana Margabandhu and former human resources head Chandrasekhar Sripada resigned from the company’s board. The reason for their departures was not specified by IBM.
IBM otherwise got a clean chit from its financial auditors Price Waterhouse and Co. on its key accounting statements and practices.
“Except for one instance of fraud involving improper and unauthorized actions of certain employees of the company resulting in overstatement of revenues aggregating to Rs.611 million and cost deferral of Rs.57 million and consequential loss amounting to Rs.129 million which was detected by the company and adjusted in these financial statements, we have neither come across any material instance of fraud on or by the company,” chartered accountant Pradip Kanakia of Price Waterhouse said in the documents.
When contacted with an email questionnaire, an IBM spokesperson said the company did not have anything further to comment or share.
IBM, which is currently making significant investments in the area of cognitive computing to fuel its next phase of growth globally, also hinted at larger scale deployment of its Watson supercomputer—famous for defeating humans on the US game show Jeopardy—to serve clients in India and Asia.
In an interview in August, IBM India chief Vanitha Narayanan had said Watson might be launched in India soon. IBM currently has a team of software developers for Watson in India, the only such centre the Armonk, New York-based company has outside its US headquarters.
Cognitive computing refers to advanced computing systems or machines that can intuitively learn and pickup functions based on everyday experiences.
Over the last decade, IBM has risen to dominate and become the top technology services vendor in a domestic market that is home to the likes of Tata Consultancy Services Ltd and Infosys Ltd. IBM, the world’s top computer services firm, replicated the global delivery model perfected by Indian software exporters and built up a workforce of over 150,000 employees in India who maintain software applications and back-office projects, among other things.
IBM does not provide a region-wise breakup of its employees in its financial reports—the employee figures for IBM in India were obtained from brokerage and industry estimates.
In 2004, IBM won a landmark $750 million outsourcing contract from Bharti Airtel Ltd, India’s largest telecom services firm, which set a trend among all Indian telecom firms such as Vodafone and Idea Cellular to outsource their non-core processes. Over the years, IBM has used its relationship with Bharti Airtel to gain more business from other top firms. With Bharti Airtel’s rapid growth over the last decade where its subscriber base has risen from 8 million to over 250 million, IBM’s share of revenues from the revenue-sharing contract has also increased exponentially. The Bharti Airtel contract, which is in the final stages of negotiation for renewal, generates $250-300 million of annual business for IBM.
IBM now is one of the top five information technology services firms operating out of India based on its latest revenues.
For IBM to maintain its dominance in the Indian market will be tough going forward, given competition from faster-growing homegrown software firms such as TCS and Infosys, experts said. Technology researcher Gartner Inc. has forecast that the domestic Indian IT market will touch $71.3 billion by 2014, with most of the growth driven by IT services.
“The fundamental problem for IBM is that globally they are the largest service provider, (but) the market is maturing—many of the strategies that got them where they were have now been emulated. They have a very strong position in the Indian market, but others are attacking them— so it’s going to be very hard for them to grow fast in India now,” said Peter Bendor-Samuel, chief executive of outsourcing consulting firm Everest Group.