02-19-2004, 04:50 AM
<b>Investors unimpressed by Indian tech recovery </b>
Reuters
Mumbai/Bangalore, February 18
<b>India's software sector is reversing a two-year slowdown on robust demand for outsourcing and steadier prices, but investors are not buying the recovery story yet and are looking instead at growth stocks elsewhere</b>.
Despite pressure on margins, software exporters have raised profit forecasts as clients loosen purse strings in a revived global economy. But fund managers want to see signs of sustained growth before stepping up exposure to the once-fancied sector.
"We need some major announcements such as big contract wins or acquisitions to fire up the imagination in the tech sector," said Ashim Syal, chief investment officer at ING Vysya Mutual Fund, which has about $39 million invested in Indian equities.
Bombay's infotech index rose only 23 per cent in 2003 compared to a 73 per cent rally in the 30-share blue chip index, which made India Asia's second-best performing stock market after Thailand's, powered by a booming economy.
"The stock market seems like a classic beauty contest and I am forced to pick only the best (sectors)," said Syal, who has cut exposure to software to 10 per cent of his portfolio, from between 25 and 30 per cent six months ago.
Indian software firms are on a hiring spree, emerging as one-stop shops that combine software with back-office services such as payroll processing for giants such as US telecoms equipment maker Cisco Systems Inc
But their profit margins have been hit as clients clamour for discounts in a fiercely competitive market and wages rise due to aggressive hiring by recent foreign entrants like Accenture Ltd.
MARGINS SEEN FALLING
Analysts expect average net profit margins at the top three listed software firms -- Infosys Technologies Ltd, Wipro and Satyam Computer Ltd -- to fall to about 22 per cent this fiscal year from about 28 per cent two years ago.
"New entrants are building offshore capacities. Bargaining power is shifting to the employees, while pricing power remains subdued," ABN Amro said in a report, while cutting its rating on the software sector to "underweight" from "neutral".
Margins for Indian exporters have also been clipped by a rising rupee, which appreciated by 5.2 per cent against the dollar last year and a further 0.8 per cent so far this year.
Fund managers expect software shares to catch up after their under-performance, but they say its time to cherry-pick in a sector poised to report $12 billion in annual exports by March 2004.
"Valuations are fair now and any decline will give us an opportunity to increase exposure to the sector," said Paras Adenwala, chief of equity funds at Birla Sun Life Asset Management, which manages Rs 90 billion ($2 billion).
According to analysts, Wipro trades at about 30 times 2004-05 estimated earnings while Infosys is at 23 times. The main Mumbai index is trading at around 16-18 times.
As India's domestic economy races ahead, money managers are mainly bullish on automobile, commodity and media stocks, while few are picking software firms.
Meanwhile, the industry is increasingly confident about the future. Infosys has raised its profit growth forecast to nearly 31 per cent for the year ended March from 25 per cent previously, while Wipro forecast sustained growth after making a record quarterly profit, aided by a rebound in its telecoms unit.
"With many customers looking to seal strategic relationships with Indian software firms, contract sizes for the industry are getting bigger and tenures are becoming longer," Satyam Computer's chief financial officer V Srinivas told Reuters.
Reuters
Mumbai/Bangalore, February 18
<b>India's software sector is reversing a two-year slowdown on robust demand for outsourcing and steadier prices, but investors are not buying the recovery story yet and are looking instead at growth stocks elsewhere</b>.
Despite pressure on margins, software exporters have raised profit forecasts as clients loosen purse strings in a revived global economy. But fund managers want to see signs of sustained growth before stepping up exposure to the once-fancied sector.
"We need some major announcements such as big contract wins or acquisitions to fire up the imagination in the tech sector," said Ashim Syal, chief investment officer at ING Vysya Mutual Fund, which has about $39 million invested in Indian equities.
Bombay's infotech index rose only 23 per cent in 2003 compared to a 73 per cent rally in the 30-share blue chip index, which made India Asia's second-best performing stock market after Thailand's, powered by a booming economy.
"The stock market seems like a classic beauty contest and I am forced to pick only the best (sectors)," said Syal, who has cut exposure to software to 10 per cent of his portfolio, from between 25 and 30 per cent six months ago.
Indian software firms are on a hiring spree, emerging as one-stop shops that combine software with back-office services such as payroll processing for giants such as US telecoms equipment maker Cisco Systems Inc
But their profit margins have been hit as clients clamour for discounts in a fiercely competitive market and wages rise due to aggressive hiring by recent foreign entrants like Accenture Ltd.
MARGINS SEEN FALLING
Analysts expect average net profit margins at the top three listed software firms -- Infosys Technologies Ltd, Wipro and Satyam Computer Ltd -- to fall to about 22 per cent this fiscal year from about 28 per cent two years ago.
"New entrants are building offshore capacities. Bargaining power is shifting to the employees, while pricing power remains subdued," ABN Amro said in a report, while cutting its rating on the software sector to "underweight" from "neutral".
Margins for Indian exporters have also been clipped by a rising rupee, which appreciated by 5.2 per cent against the dollar last year and a further 0.8 per cent so far this year.
Fund managers expect software shares to catch up after their under-performance, but they say its time to cherry-pick in a sector poised to report $12 billion in annual exports by March 2004.
"Valuations are fair now and any decline will give us an opportunity to increase exposure to the sector," said Paras Adenwala, chief of equity funds at Birla Sun Life Asset Management, which manages Rs 90 billion ($2 billion).
According to analysts, Wipro trades at about 30 times 2004-05 estimated earnings while Infosys is at 23 times. The main Mumbai index is trading at around 16-18 times.
As India's domestic economy races ahead, money managers are mainly bullish on automobile, commodity and media stocks, while few are picking software firms.
Meanwhile, the industry is increasingly confident about the future. Infosys has raised its profit growth forecast to nearly 31 per cent for the year ended March from 25 per cent previously, while Wipro forecast sustained growth after making a record quarterly profit, aided by a rebound in its telecoms unit.
"With many customers looking to seal strategic relationships with Indian software firms, contract sizes for the industry are getting bigger and tenures are becoming longer," Satyam Computer's chief financial officer V Srinivas told Reuters.