X

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.
Indian IT: And the show begins - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Oct 11, 2004

    Indian IT: And the show begins

    The second quarter result season for Indian software companies begins today with software and BPO services provider, MphasiS, slated to announce its numbers in a short while from now. Investor expectations of a strong growth in earnings in the second quarter have been the key driver for these stocks to move up in recent times.

    While the long-term growth story for Indian technology companies looks promising in the wake of increased move towards offshoring, there are some short to medium term concerns that investors need to take note of. Let us discuss some of these concerns in detail.

    Wage inflation and attrition: Maintaining a low employee turnover (or low attrition) is probably the biggest concern for Indian software companies. Average attrition rate in IT services currently hovers around the 15% levels and this is high considering the fact that retaining human resources is the key to any software services company sustaining its growth momentum. BPO attrition is much higher at over 25% levels. Aggressive hiring by MNC technology companies has aggravated this concern. Not only has this led to higher attrition in Indian companies, as seen by numerous mid-level managers shifting from Indian majors to MNC companies, it has also resulted in rising employee costs for Indian companies that have been trying hard to retain key people. Indian software companies, as they move up the value chain, are also likely to add a large number of high-end consultants/experts to their payrolls, and this might put additional pressure on their margins going forward.

    Rupee appreciation: The rupee appreciated against the US dollar by 8.7% in FY04. This led to further pressure on margins that had already been affected by declining billing rates and companies' continuous spending towards building up physical (sales and marketing network and development centres) and human (manpower) infrastructure. However, during the period April-August 2004, the Indian rupee depreciated by 6.8%, bringing some cheer to Indian software companies. But this cheer seems to have been cut short, as the rupee has again appreciated against the dollar (1.2% appreciation since August). Considering that the US economy is reeling under a huge US$ 600 bn current account deficit, a likely pressure on the dollar cannot be ruled out in the medium term. Thus, a further appreciation of the rupee will again have a negative effect on Indian software companies' margins.

    Political rhetoric: The backlash in the US against offshoring to low-cost countries like India has raised some medium-term concerns for Indian software companies. This is because of the fact that these companies have a large portion of their revenues emanating from the US. While we believe that, over the long-term, sound economics is more likely to take the front seat, near term concerns can have a serious effect on sentiment.

    Software: Results this week
    Company Result on
    Infosys 12-Oct-04
    TCS 13-Oct-04
    Hughes Software 13-Oct-04
    Wipro 15-Oct-04
    While these concerns mark the medium term prospects of Indian software companies, investors also need to realise that huge expectations from these companies have led to their valuations reaching high levels. The average P/E for the Indian software sector is around 26.2 times our expected FY05 earnings and most of the companies are trading at or near the high levels of their respective price bands. This is, therefore, a time to practice caution. Strong fundamentals and not strong results for a quarter or two should be the basis for investment.

     

     

    Equitymaster requests your view! Post a comment on "Indian IT: And the show begins". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    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.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    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 SENSEX


    Aug 22, 2017 (Close)

    MARKET STATS