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Software: What to look out for? - Views on News from Equitymaster
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  • Nov 21, 2001

    Software: What to look out for?

    IBM’s revenues from services in fiscal year ending December 2000 were US$ 33 bn (Rs 1,224 bn). This is roughly six times the revenue of the whole of the Indian software sector put together for the year ending March 2001. Thus, IBM must have felt the heat of the slowdown more than any Indian company. Also, IBM does not have much of an offshore infrastructure and consequently, cannot offer the offshore advantage to its clients. IBM India’s revenues from FY01 were US$ 173 m (Rs 8,322 m). This would include revenues from software products and hardware.

    The company’s revenues for the third quarter of the fiscal declined by 0.7% on sequential basis and grew by 5.5% on a YoY basis. This does look disappointing compared to the 2Q numbers. However, if these numbers are compared with corresponding quarters last year, the growth is far healthier on a YoY basis. Another very interesting observation is that IBM’s gross margin from the services segment has been heading north. This indicates that that the company is able to hold its own inspite of the severe price competition by players from the India.

    At a recent analyst meet the company’s Chief Operating Officer, Sam Palmisano, indicated that demand for outsourcing and services is improving even as the economy weakens. However he also noted the demand for new technology and products is declining.

    Another indication could be Cisco’s performance for the quarter ended September. The company managed to post a sequential growth for the first time during the calendar year in this quarter. Though Cisco beat earnings estimates, it expects the next quarter to be flat. Cisco has a 74% share of the high-speed routers markets.

    Against these two positives there are a host of negatives, which include profit warnings and disappointing numbers from a number of software companies. However, when the tides turns it is the best that lead.

    Indian software stocks have rallied quite a bit in the past few days. The top gainers for the past week include mostly software companies with the second run software companies seem to be dominating the gainers list. What is more interesting is the phenomenal returns these stocks have offered over the past week.

    Top gainers over the week : BSE 'A' Group
    Nov 20, 2001 (Rs) Nov 13, 2001 (Rs) H/L (Rs)
    TRIGYN TECHNOLOGIES 70 45 55.2% 450 / 21
    PENTAMEDIA 57 40 42.1% 388 / 20
    POLARIS SOFTWARE 129 95 35.1% 453 / 50
    MASTEK 120 94 28.3% 600 / 53
    SILVERLINE TECH 51 40 27.0% 335 / 23
    SATYAM COMP 199 157 26.2% 430 / 111
    SONATA SOFTWARE 18 15 24.9% 69 / 6
    INFOSYS 3611 2899 24.6% 7,777 / 2,156
    ROLTA INDIA 78 63 24.3% 250 / 33
    SHREE RAMA MULTI 40 32 24.3% 81 / 21
    TATA INFOTECH 125 101 23.6% 267 / 82
    WIPRO 1320 1083 21.9% 3,074 / 763
    HUGHES SOFTWARE 304 251 21.2% 1,065 / 159
    SAREGAMA 146 122 20.30% 563 / 82
    HFCL 82 69 19.80% 1,585 / 25

    But the list also, includes sector stalwarts like Wipro and Infosys, even though these stocks are highly priced. But the fundamental reason why investors can stick to these stocks is for the simple fact that when the tide turns, these will be the companies that will be able to capture a larger part of the business that comes in. They have clear business focus, sound managements’ and proactive strategies in place. As for some of the others, there is no clear definition as what they exactly do as many of these companies change their business focus as frequently as their managements’ change.

    At the end of the day lure of easy money defeats all reason. It always has. But the tech meltdown is not an event of the distant past. Stick to quality, be prudent and invest wisely.



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