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Software: Time to buy

Sep 24, 2001

As the debate about the impact of the events in the US on the Indian software industry rages, the markets are taking no chances. Software stocks have been falling like a stone on the bourses. While the short-term prospects for the industry don’t seem to be so bright (compared to the FY01), the fact remains over the next two to three year time frame the sector definitely has a lot in store for the investors. Before making a point as to where the opportunity for the software sector is, let us look at the role the IT will play for the organisations in the future. IT is increasingly becoming central to business strategy and those organisations that are not able to put IT to work for them will find the going very tough in the future. With increasing globalisation and therefore competition, organisations have lesser room for trial and error. In future organisations need to have quality levels of the order of six-sigma. If these are rules that that organisations have to live by in the future, how many are ready? The answer is a few.

While over the past few years there have been efforts by organisations to automate business processes and some have even gone ahead to use the new delivery channel - the Internet, the simple fact remains that a lot of organisations still have isolated applications taking care of specific business functions and some do not even have a presence on the web. Even if they do so, the understanding and alignment with business processes is quite limited. And while the larger corporates jumped on to the IT bandwagon, the small and medium enterprises over the globe are yet to join in. Though there are no measures available, its is quite certain that the penetration of IT in organisations has been limited not all organisations are ready for the ‘new economy’

For those companies focused on technology, the future has perhaps a lot more to offer, though the present seems to be a lot more disappointing. The bandwidth availability all over the globe is not ‘as it should be’. While at one end service providers will increase bandwidth, the companies will continue to work to make faster boxes that will effectively improve the speed of the Internet. Again, the technology is changing the way we communicate though WAP has been a big disappointment SMS has been widely accepted. Also, the need to access the Internet on the move is some thing that the industry has not met yet and the need is a genuine one for which the consumers are willing to pay, may be not in a slowdown but when the times are a lot better.

Attractive valuations
(Rs m) Expected CAGR* EPS (FY04E) Current market price P/E
Infosys 33% 230.3 2,340 10.2
Wipro 16% 53.6 978 18.2
Satyam 36% 26.2 118 4.5
*CAGR for FY01 to FY04        

According to Gartner the global spending on software and IT services is estimated to grow at a CAGR of 16% to reach to a size of US$ 1,525 bn by 2005. Considering this the Indian software industry with revenues of US$ 8 bn had a market share of about 1% in FY01. Thus due to this small market share the sector is definitely set to grow at above the global growth rates for the next few years. Considering this the valuations the key stocks in the sector do definitely look attractive.

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