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Software: The ‘where to invest’ syndrome

Jul 21, 2003

Software stocks, in their very own way, have been largely volatile in recent times. To get a view of retail investors’ perception about stocks of Indian IT companies, we asked them where did they find value in the software sector – large-cap stocks, mid-cap stocks, or did they find no value at all. A look back…
Before going into the response of our viewers, why this poll at this juncture? There is a sea change in investor sentiment towards technology stocks post Infosys’ 1QFY04 results as compared to April 2003 (the day Infosys announced its FY03 results on April 10th, 2003, the stock tumbled by almost 25%). The adverse reaction was not restricted to Infosys alone, but the BSE Tech index also lost significantly (as can be seen from the graph below). Since then, even top rung tech majors have been viewed with a sense of caution.

The response…
The response to out poll is not surprisingly mixed, mostly in favour of large-cap stocks. 42% of the respondents polled that they see value in large-cap stocks, which is a good sign. 38% still opted for mid-cap stocks, despite the mayhem in the market. The remaining 20%, however, did not find value in Indian software stocks. Past experiences are likely to have played their part.

Our view…
The recent upheavals in Indian IT stocks bring out a stark reality. While the effect on stock prices of the top-rung Indian IT majors have been less severe (or they have recovered in the last quarter), mid-caps have had mixed fortunes. After rising post FY03 results, the 1QFY04 performance of some of the tech companies like Mastek has once again highlighted the risk of investing in smaller companies. This is one of the reasons why investors have to place higher weightage on the quality of management. It is not surprising to see that smaller rung tech stocks are once again heading south (or likely to head south sooner or later).

The poll results exhibit one important fact that investors in IT stocks, going forward, are likely to pick and choose from among companies that provide them with ‘realistic‘ value rather than ‘unrealistic’ growth promises. This downturn has been an eye-opener for not only Indian software companies but also for retail investors in general. Investors seem to have realized how important it is to stick with quality companies. By quality, we mean the management’s ability to foresee trends and position themselves accordingly. Realism seems to be setting in among investors. It is important to acknowledge the fact that the software sector has its own set of variables that have a major say when it comes to determining long-term survival of a company. It is better to be safe than sorry.

Please click here to read our sector primer: Identifying a software stock: Do’s and Don’ts

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