Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Software: The Big 3 - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jul 25, 2003

    Software: The Big 3

    The June quarter financial results for the top three Indian IT majors Infosys, Satyam and Wipro (ISW) have been declared. Here in this article, we consider the combined results of the Big three, as they more or less reflect the Indian software sector. The combined sequential topline growth for the companies has been 6%, while profits grew by 14%. Operating margins continue to face pressure and have fallen by 100 basis points sequentially.

    The three combined...
    Rs m 4QFY03 1QFY04 Change
    Sales 26,625 28,283 6.2%
    Other Income 529 705 33.3%
    Expenditure 19,267 20,771 7.8%
    Operating Profit (EBDIT) 7,358 7,511 2.1%
    Operating Profit Margin (%) 27.6% 26.6%
    Interest 2 8
    Depreciation 1,261 1,060 -16.0%
    Profit before Tax 6,624 7,149 7.9%
    Extraordinary items 0 0
    Tax 1,213 971 -19.9%
    Profit after Tax/(Loss) 5,411 6,178 14.2%
    Net profit margin (%) 20.3% 21.8%
    No. of Shares 613.2 613.2
    Diluted Earnings per share* (Rs) 35.3 40.3 14.2%
    (* annualised)

    While the pressure on billing rates continue, the topline growth for ISW has been driven by growth in volumes and higher utilizations. Also, as these companies are moving up the value chain, they are increasing their revenues from onsite services. Onsite services have higher billing rates as compared to offshore services. Sequential growth in volumes for Infosys, Wipro and Satyam was 9.6%, 6.4% and 6.2%, respectively. Though billing rates were under pressure in 1QFY04 also, the decline was less severe than that was witnessed in the previous quarters. All three companies are expecting stability in billing rates going forward. It remains to be seen how billing rates move over the next few quarters (we have factored in a 3%-5% fall in blended billing rate for the aforesaid companies in our estimates).

    While billing rates may still take a while to stabilize, ISW continue to be optimistic on volume-based growth. This is reflected from their additions in manpower in the recent past. However, Satyam seems to be less aggressive than Infosys and Wipro. In 1QFY04, while Infosys and Wipro added 1,700 and 2,251 employees respectively, Satyam added just 833 people.

    Apart form billing rate pressure, increase in expenses have also impacted 1QFY04 operating margins for ISW. Personnel expenses, for example, have risen mainly on account of increase in employees and staff-related costs. Also, as these companies are putting up systems and infrastructure in place by setting up new development centres and improving on their marketing and distribution channels, selling and general expenses have also seen a sequential growth. These increases have resulted in total expenditure for ISW increase by around 8%, relatively higher than their topline growth. Infosys continues to maintain superior margins compared to its peers.

    Despite the downturn, Infosys and Satyam have revised their revenue and/or earnings guidance for FY04. These upward projections come at a time when uncertainty regarding the global economic slowdown still prevails.

    A look at valuations...
    Infosys* Satyam* Wipro**
    Current market price (Rs) 3477 190 923
    P/E (x) 20.7 11.9 23.1
    Market cap/sales (x) 5.2 2.5 4.1
    * based on companies' FY04 projections
    ** based on our FY04 projections

    As global majors recognize the benefits of the Indian offshore software service model, companies that are able to scale up their operations are likely to benefit. However, investors need to look beyond the financials. Sound management policies and excellent work ethics will differentiate the great from the good. Compared to the frenzy during early 2000, in the last three years, retail investors have learned a lesson or two when it comes to selecting software stocks .

    Consider this question: Where have the likes of DSQ Software, Global Tele and Silverline gone?



    Equitymaster requests your view! Post a comment on "Software: The Big 3". Click here!


    More Views on News

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    Ankit Shah's First Five Insider Recommendations (The 5 Minute Wrapup)

    Aug 5, 2017

    How to get exclusive insider recommendations from Ankit Shah.

    TCS: Currency Volatility Plays Spoilsport (Quarterly Results Update - Detailed)

    Jul 14, 2017

    TCS starts FY18 decently despite an adverse currency impact.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE IT

    Aug 18, 2017 (Close)