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Software: Divergent trends - Views on News from Equitymaster
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  • May 21, 2003

    Software: Divergent trends

    Indian software stocks have been battered in the Indian as well as the US markets. However, it is a different story for US IT stocks. Technology stocks in the US have risen strongly and steadily in the past few months, seemingly due to optimism expressed by investors that a pick-up in IT spending is on the horizon. While there has been an interest in technology stocks in the last two months, it is premature to say, based on investor sentiments, whether we are witnessing a revival of the global IT sector.

    For one, global IT majors do not seem too confident. Their reiteration that while demand has stabilized, absolute triggers of a full-fledged recovery are still not visible indicates the lack of confidence. Hence, we believe that US technology stocks may have moved too fast in anticipation of a positive outlook. Unless some hard evidence emerges, indicating resurgence in demand for technology products and services, it is likely to be tough for global technology stocks to maintain their upward momentum.

    Global IT majors gain…
    Nasdaq quotes (in US $) Mar-03 May-03 Change May-02 May-03 Change
    Intel 16 19 18.5% 30 19 -37.3%
    Microsoft 23 25 7.0% 26 25 -5.4%
    HP* 19 21 10.5% 19 21 10.5%
    IBM 77 86 12.6% 85 86 1.7%
    Dell 26 30 15.7% 27 30 12.4%
    *NYSE quotes

    Giants like Intel, Microsoft, HP, IBM and Dell have seen their stock prices rise in the US stock markets over the period since March 2003. While Intel and Microsoft have seen a downturn during the past year, the overall performance for these global giants has been rather promising on the bourses. A host of new initiatives, stable financial performance and optimism on better times ahead is leading the technology rally in the US. For example, Microsoft, recognizing the tough economic environment, is relying on its ongoing investment in R&D to enhance productivity and value of its IT investments. PC major Dell Computers expects growth to be driven mainly by a combination of concentration on growth in the core businesses and investment in long-term opportunities related to its core businesses. Though the outlook of these companies seems forward looking, it may be a while before real benefits are derived from their strategies.

    …while Indian ones languish
    Nasdaq quotes (in US $) Mar-03 May-03 Change May-02 May-03 Change
    Infosys 63 41 -34.9% 63 41 -34.4%
    Wipro 30 20 -34.0% 34 20 -41.8%
    Satyam 10 8 -19.5% 10 8 -19.5%

    However, the performance of Indian software majors has been relatively disappointing, both in the Indian stock markets and on the Nasdaq. Infosys Technologies, for example, has seen a significant fall on the Nasdaq, of around 35%, both for March-May ‘03 and May ‘02-May ‘03. Wipro and Satyam have also witnessed considerable decline in their ADR prices during this period. This downgrading of Infosys’ stock, for example, is mainly a result of pressure the company is facing on pricing front, and consequently its ‘less-than-expected’ projections for FY04. Indian investors, thus, seem to be less optimistic than their American counterparts and have been observing utmost caution while investing in software stocks.

    During the 1990s, technology sales worldwide grew by more than 10% per year, thus fueling healthy profit margins. But times have changed now and the growth seen in the 90’s may not be seen in this decade. IT spending from corporates has become more rationalised. Times have also changed to the extent that Indian companies are facing increasing competition on the home-turf from global IT majors. And the effects of this are apparently seen in the performance of Indian software stocks in the recent past. Thus, investors need to exercise caution on selecting their picks from the Indian software sector. For one, only those players with significant size and adequate systems in place will be able to survive and grow in the future. Investor confidence in turn is likely to favour such entities.



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