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  • SEPTEMBER 13, 2000

Software: Take your pick

The Indian software industry has a very promising future. It has the potential to alter the future course of the Indian economy. Software companies will have to move up the value chain fast and offer niche products and services.

Software industry in India is growing rapidly. The potential growth areas include e-commerce, mobile computing, re-engineering and system integration. Software companies need to move up the value chain fast by providing end to end consultancy service and creating unique software products. Customised software development will continue to be the mainstay of the industry.

There are very few companies in India specialising in software products, as product development requires huge capital and there is always a risk of failure. Although margins in this area are high, it also entails large marketing expenses. Also branding is a key differentiater for moving ahead in the software products market. A software company is no longer evaluated only on cost platform; it is also being evaluated on a value platform.

In a bid to become MNCs, Indian software companies need to beef up existing markets, penetrate under developed markets and explore new markets. Currently software companies derive more that 80% of revenues from the US. All those players who have attained critical mass need to expand their geographical contribution markets.

Indian software companies derive their high valuations from their expected future performance and better business prospects. Although their current valuations seem t be on the higher side, they may be justified considering the opportunities available in the software industry, in emerging areas like e-commerce and mobile commerce. Comparative valuations indicate that currently NIIT and PSI Data are the cheapest available stocks among this group. These companies will be re-rated once they show good growth in financial performance and move up the value chain.

Comparative Valuations
ParticularsInfosysSatyam HCL
Technology
WiproDigital
Market Price8,8476161,2513,271561
P/E110768530266
Market Cap/Sales3616193217

ParticularsVisualSoftPSI DataHughes
Software
NIITSSI
Market Price1,8067431,4401,7413,079
P/E125341273069
Market Cap/Sales52745820

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