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.
Software stocks: Apply caution! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 2, 2003

    Software stocks: Apply caution!

    The month of November has been particularly good for the investors in the Indian software sector as seen by strong gains that stocks from this sector have witnessed in this period. Notably, even shunned companies like DSQ Software, Silverline, etc. have seen their stock prices rally substantially and this brings in all the more reasons for investors to apply caution before making their investment decisions. While growth prospects for the Indian software sector have not changed much from the past, it is not particularly difficult to deduce that speculative actions have played their part in this strong rally in Indian software stocks.

    While it is right to say that the performance that Indian software companies, especially the majors, have shown in the second quarter of FY04 goes in line with the improving prospects of the Indian software sector as a whole, the sudden upsurge in stock prices of almost all companies from this sector seems unwarranted. Take a look at the table below. While rapid gains in November have helped Infosys, Wipro and Digital reverse their losses (or reduce them) for the January-October 2003 period, investors in Satyam have seen their gains more than double.

    Rising, but why?
      Jan-Oct Jan-Nov
    Sensex 46.2% 53.8%
    Infosys -1.2% 8.1%
    Wipro -18.1% -1.2%
    Satyam 11.7% 27.0%
    Digital -12.7% 16.0%

    Just as a matter of fact, in the recently concluded September quarter results announcement, most of the Indian software majors have reported 'decent' growth in their topline and bottomline just providing reasons for investors to improve their outlook towards the sector. Also, most of the managements have indicated towards reduced pressure on their performance in times to come.

    The performance in 2QFY04
      Revenues   PAT   OPM
      1QFY04 2QFY04 Change 1QFY04 2QFY04 Change 1QFY04 2QFY04
    Infosys 10,820 11,348 4.9% 2,781 3,002 7.9% 32.2% 33.3%
    Satyam 5,597 5,985 6.9% 1,215 1,476 21.5% 29.0% 27.8%
    Wipro 11,989 13,745 14.6% 2,061 2,302 11.7% 18.0% 18.0%
    Digital 1,350 1,456 7.9% 302 319 5.6% 27.0% 26.3%
    Hughes 765 850 11.1% 152 169 11.2% 26.9% 26.9%
    MphasiS 1,302 1,429 9.8% 195 255 30.8% 13.5% 15.3%
    i-flex 1,623 1,870 15.2% 398 503 26.4% 31.9% 31.4%
    Total 33,446 36,683 9.7% 7,104 8,026 13.0% 25.5% 25.6%

    While the focus on volume led growth continued in the September quarter, some of these companies actually witnessed marginal improvements in the billing rates they charge to their clients. Now, while this does not signify the reversal of pressure on the pricing front, what this means is 'reduced' pressure on these companies in respect of the overall pricing environment. As the scene on the global technology-spending front seems to be improving, the effects are witnessed in form of reduced pressure on billing rates.

    Now, while there has been some stability restored on the pricing front, Indian software companies are continuing to focus on growing their volumes. And there have been some medium to large size deals that have helped these companies on this front. The most notable of these deals were Telstra (Infosys) and Fujitsu (Satyam). Initiatives on the scalability front also continued in the September quarter with Infosys leading the pack with over 2,000 additions to its manpower. As Indian companies move higher on the software value chain, the need to attract and retain employees would be a key factor.

    All said and done, the positive effects of slowdown seems to be acting now in favour of the Indian software majors that have reengineered their business models through widening their service base and moving up the software value chain. This has indeed provided increased levels of optimism to investors in Indian technology stocks. However, as we had mentioned earlier, valuations for most of the Indian software companies now seem stretched and already factor in growth for the next 2-3 years. Investors, thus, need to practice caution and restrict only to quality companies (like Infosys) with highly scalable business models.



    Equitymaster requests your view! Post a comment on "Software stocks: Apply caution!". 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.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    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.

    Which Gods Will Bring Down the US Empire? (Vivek Kaul's Diary)

    Aug 17, 2017

    Mr Trump is in the White House and the gods are in their heavens; what's not to like?

    Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

    Aug 16, 2017

    All across the country, the old gods become devils. New, gluten-free gods take their places...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    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.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    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: 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


    Aug 17, 2017 (Close)