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Software: Be careful - Views on News from Equitymaster
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  • Nov 29, 2002

    Software: Be careful

    In the recent past there has been frenzied buying in technology stocks due to a string of order wins by the software majors. At this juncture no matter how attractive certain scrips look, be very careful while making an investment decision. Do not give into the frenzy.

    Latest to announce an order win was NIIT. The company's BPO subsidiary SmartServe won a US$ 10 m order for a period of five years.

    Top 15 gainers over the month: Software
    Nov 05, 2002 (Rs) Dec 6, 2002 (Rs) H/L (Rs)
    BSE-SENSEX 2,994 3,306 10.4% 3,758 / 2,828
    S&P CNX NFTY 963 1,070 11.2% 1,206 / 920
    RAMCO SYSTEMS 120 328 173.5% 325 / 118
    DSQ SOFTWARE 12 21 83.5% 81 / 10
    SILVERLINE TECH 17 31 82.1% 84 / 15
    PENTASOFT TECH. 8 13 54.8% 42 / 7
    PSI DATA SYS 71 102 43.7% 210 / 68
    HEXAWARE TECH 84 118 40.3% 118 / 38
    TRIGYN TECHNOLOGIES 22 31 40.2% 110 / 20
    TATA INFOTECH 151 205 35.4% 334 / 126
    NIIT 126 168 34.1% 350 / 113
    ROLTA INDIA 71 93 32.3% 195 / 65
    SSI LTD. 85 109 29.3% 274 / 81
    HUGHES SOFTWARE 155 200 29.3% 393 / 125
    POLARIS SOFTWARE 147 188 27.7% 285 / 142
    KALE CONSULTANTS 41 52 26.9% 88 / 40
    SONATA SOFTWARE 16 20 26.7% 23 / 12

    The top five gainers from the software sector over the past month are DSQ Software, Silverline Technologies, Pentasoft Technologies and Sonata Software. Each one of these stocks is a big no for the retail investors. Do not even touch them with a barge pole. While some of these have managements that are not exactly shareholder friendly, others have are significantly small in size. It is unlikely that the smaller software companies will be able to cash in on the next wave of IT outsourcing to India.

    Let us take DSQ's case for example. The company has posted a loss of Rs 720 m for FY02. The company's topline for FY02 was Rs 3,204 m. This translates to quarterly revenues of about Rs 800 m. However, for 1QFY03 the company posted revenues of just Rs 124 m and a loss of Rs 222 m. The loss is more than the revenues.

    Gradually, corporates are increasingly outsourcing larger contracts. These are mission critical in nature. Therefore, they would prefer to work with vendors who can offer them all the services under one roof and more importantly are likely to be in business in the next few years. Further, the next phase of growth will be volumes based and therefore, the software companies will have to get their marketing infrastructure in place. The smaller companies are at a big disadvantage on this front.

    And finally the valuations, Ramco systems also posted a loss of Rs 62 m for the quarter ended September. The company's EPS is a negative Rs 8. This means that instead of a profit per share of Rs 8, the shareholder's share is a loss of Rs 8. Silverline that extended its year-end has posted a significant decline in profits for FY02 (15 months). The company's management in the past has taken steps that have not exactly been shareholder friendly.

    While there are a number of blue chips not necessarily from the software sector that are trading at attractive valuations. They provide excellent investment opportunism. However, if you still want to invest in the software sector it would be wiser to stick with the best even though valuations appear to be on the higher side. (Read more)



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