Sep 21, 2004|
Software: Is the optimism justified?
Since the beginning of this fiscal (April 2004), stocks from the software sector have gained much attraction. Investors' seem to be buying software stocks based on the presumption that the sector is insulated from uncertainties on account of factors like high inflation and fears of an interest rate hike. Therefore, software stocks have been recently quoted as 'defensives'.
Software stocks: Improving times?
Apart from the above factor, higher earnings growth expectations also seem to have played an important part in the buying spree. What we gather from the managements of software companies is that billing rates are expected to stabilize at the current levels and the contribution from value added services is likely to increase. Volumes are also expected to grow strongly as a result of offshoring gaining further steam.
"BPO and IT can change the face of India in 10 years time," said Akshaya Bhargava, the CEO of Progeon, Infosys' BPO subsidiary. He further emphasized on the fact that, over the past twelve months, clients are increasingly bidding for projects that combine IT services with BPO. Managements of large and medium-sized Indian IT companies like Infosys, Wipro and MphasiS (who provide BPO also) have stressed on the fact that Indian players need to move on to a high pedestal of the value chain i.e. they need to provide high value services in the BPO space as well, in order to ward of any threat from other cost competitive nations like China, Thailand and the Philippines. During the past two months, all the managements whom we have met have spelled out a positive outlook for the Indian offshoring story, especially for BPO services.
This is indicated from the fact that, apart from IT services, these companies have been hiring rapidly on the BPO front. Wipro and MphasiS, for instance, hired 1,449 and 457 employees respectively in 1QFY05 in the BPO space, which was 48% and 60% respectively of total employees added in the quarter.
As seen from the graph above, at current prices, the large horizontal players - Infosys, Wipro and Satyam - are trading at valuations that are above the average P/E of the Indian software sector. And this is the result of the high expectations that have been built-up ahead of the second quarter results. Notably, a large proportion of the P/E (24.9 times) is on account of these software majors. If one were to exclude them, the average P/E of the sector is lower at 18 times, which is still at the higher end of the spectrum considering the expected earnings growth for FY05.
On the other hand, valuations for vertical players like Geometric Software and Hughes Software are below the average P/E. This is indicative of the higher risks that investors associate with these relatively small and focused players. However, this is not to say that these companies, due to their respective domain competencies, have a high potential to grow in the future.
All in all, despite the recent spurt in valuations of Indian software companies, we believe that investors could still benefit from a long-term investment strategy. However, they need to pick and choose rather than following an all out approach. Software companies, being in a globally competitive space, require management vision and capabilities on the delivery and execution fronts. As such, investors would benefit from investing in companies with sound business models and visionary managements.
More Views on News
Aug 2, 2017
A better than expected turnaround in performance results in a change in view.
Jul 27, 2017
Digital services drive growth for Wipro in 1QFY18.
Jul 14, 2017
Infosys starts FY18 on an encouraging note with a stable performance.
Aug 5, 2017
How to get exclusive insider recommendations from Ankit Shah.
Jul 14, 2017
TCS starts FY18 decently despite an adverse currency impact.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407