Indian IT: What's in store for 2004? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Indian IT: What's in store for 2004?

Mar 9, 2004

Stocks from the Indian software sector have not seen much activity on the bourses in recent times. This is unlike what happened in the most of 2003 when these stocks moved up incessantly, however, underperforming the benchmark indices. In the closing period of 2003, it looked like the Indian software sector was emerging from the slowdown that had engulfed their performance in the past couple of years. Now, into 2004, while stocks from this sector have again under-performed the benchmark indices for the period of January till now, a lot more seems to be in store for some of the companies in the sector. Let us try and understand what 2004 might have in store for some of the major companies from this sector. For our discussion, we take the three software services majors - Infosys, Wipro and Satyam.


Being one of the most respected companies in the country does not come easy for Infosys. After the grueling 2001 and 2002 and a relatively better 2003, Infosys now seems well poised to take advantage of the huge outsourcing opportunity. In anticipation of large (both in terms of size and number) outsourcing contracts, the company is rapidly scaling up its resources (manpower, development centres and marketing infrastructure). Boasting of a huge 23,000+ workforce, the company has created a global mark in terms of people management and service delivery. While the major contributors to Infosys' revenues have been basic software development (24% of 3QFY04 revenues) and maintenance (32%) services, the company is moving up the software value chain by providing services in the areas of package implementation (15%) and IT consulting (4%). While factors like continued pressure on billing rates, consistent spending on expanding reach and the need to have competitive salaries have dented Infosys' margins, these seem to be stabilizing now. This is because while the pricing pressure has somewhat eased, the company is now reaping scale benefits of the expansion expenditure that it has already made.

At the current price of Rs 5,102, the stocks is trading at a P/E multiple of 21.6x our estimated FY05 earnings. The company seems to be reaping rewards of its consistent initiatives on improving its domain competencies and is increasing its focus on the fast growing telecom and banking and financial services (BFSI) verticals. While the company has been on a hiring spree in anticipation of increased demand for its services, the future growth would depend largely on how it manages such a large workforce and what route it takes towards strengthening its foothold in the domains of global technology majors. Considering the track record of the management, we are positive for the long term.


Wipro is one of the very few software companies that have been aggressive in growing the businesses inorganically, and successfully too. In 2003, the company acquired majority interests in a few niche players like NerveWire (IT consulting), Spectramind (BPO) and Ericsson's R&D Centre (telecom) and most of them have started to reap rewards for the company. Wipro was one of the worst sufferers in the slowdown in technology spending because of its concentration on the technology R&D space. This is because whenever there is a slowdown, companies tend to reduce the R&D budget first because these are typically new initiatives. This affected Wipro's performance. Now, as compared to the past, Wipro has a lot more diversified business model with presence in BPO (11% of FY03 revenues), infrastructure outsourcing (6%), consulting (3%) and package implementation (11%). This is a positive for the long term.

At the current price of Rs 1,434, the stock trades at a P/E multiple of 30.2x our FY05 estimated earnings. The stock has historically traded at a premium to the sector partly due to low floating stock and this makes it a risky proposition for retail investors. While the management is visionary, what is required is a consistent performance over a longer period of time to have a comfort factor with investors. Although the inorganic growth strategy is positive, it could affect the overall performance in the medium term.


Quite unlike its abovementioned peers, Satyam was unable to grow volumes in the past two years of slowdown. This was in addition to the secular pricing pressure that was faced by the entire industry. The company's financial performance also bore the brunt of huge write-offs on the investments gone sour. However, Satyam now seems to be getting its act together. The company has posted a sustained growth in topline and bottomline in the last four quarters. Also, Satyam seems to be moving up the value chain, as can be seen from higher contribution from the package implementation space (28% of 3QFY04 revenues). This has, consequently, helped the company improve the quality of its clients.

At the current price of Rs 303, Satyam is trading at a P/E multiple of 13.7x our estimated FY05 earnings. While, in the past, the company has been relatively less aggressive on the scalability front, it seems to be catching up now. And this is reflected in higher volume growth that was missing earlier. All said and done, Satyam has been inconsistent in the past and one hopes that the management does not repeat its mistakes of making unfruitful investments.

Equitymaster requests your view! Post a comment on "Indian IT: What's in store for 2004?". Click here!


More Views on News

L&T INFOTECH LTD Share Price Down by 5%; BSE IT Index Down 0.5% (Market Updates)

Sep 22, 2020 | Updated on Sep 22, 2020

L&T INFOTECH LTD share price is trading down by 5% and its current market price is Rs 2,673. The BSE IT is down by 0.5%. The top gainers in the BSE IT Index are HCL TECHNOLOGIES (up 1.3%) and TCS (up 0.6%). The top losers is L&T INFOTECH LTD (down 5.0%)..

QUESS CORP. LTD Share Price Down by 5%; BSE IT Index Up 0.1% (Market Updates)

Sep 22, 2020 | Updated on Sep 22, 2020

QUESS CORP. LTD share price is trading down by 5% and its current market price is Rs 415. The BSE IT is up by 0.1%. The top gainers in the BSE IT Index are HCL TECHNOLOGIES (up 1.5%) and TECH MAHINDRA (up 1.2%). The top losers are QUESS CORP. LTD (down 5.1%) and CYIENT (down 5.3%).

SONATA SOFTWARE Share Price Down by 7%; BSE IT Index Up 0.5% (Market Updates)

Sep 22, 2020 | Updated on Sep 22, 2020

SONATA SOFTWARE share price is trading down by 7% and its current market price is Rs 331. The BSE IT is up by 0.5%. The top gainers in the BSE IT Index are HCL TECHNOLOGIES (up 2.0%) and TCS (up 1.2%). The top losers are SONATA SOFTWARE (down 6.6%) and PERSISTENT SYSTEMS (down 5.4%).

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why am I Recommending Caution? (Fast Profits Daily)

Sep 9, 2020

This is why I have changed my short-term view on the market.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 22, 2020 03:37 PM