ANALYSIS-Agile India software stocks offer value
Wednesday November 17, 12:58 am Eastern Time
By Y.P.Rajesh
BANGALORE, India, Nov 17 (Reuters) - India's glittering computer software stocks will prove to be golden investments as the industry feasts on a global appetite for software services.
Despite having soared to dizzying heights, the stocks were unlikely to get vertigo, sector analysts said. The firms have successfully crossed the Y2K hump and started raking in business orders in a range of new technology areas that assure high returns.
Though several software stocks may seem overpriced due to their high price-earning multiples, the analysts said the pricing was justified and the stocks would still be rated ``buys' as they promised long-term gains.
DRIVEN BY PROFIT GROWTH
``Consistent profit growth is the single big reason behind the performance of software stocks,' said Rajesh Iyer, analyst at Triumph International Research. ``Valuations will continue to rise as earnings growth rates remain consistent.'
Alroy Lobo, analyst at Kotak Securities, said it was the consistent growth in earnings that had boosted market sentiment.
India's software stocks have soared to new highs for over a year now, even as the rest of the country's industrial sector has haltingly recovered from a general economic slowdown.
Riding on consistent quarterly earnings growth rates of 50 to 60 percent, their prices have climbed at a giddying pace.
Leading the pack has been Infosys Technologies Ltd (NasdaqNM:INFY - news), a market favourite whose stock price had multiplied around five-and-a-half times to 8,170 rupees by November 16 from its December 31, 1998, close of 1,479.25 rupees.
An earnings growth rate that has doubled every quarter compared to the year-earlier quarter drove the stock price. Its stellar performance on the NASDAQ market since it listed in March led the domestic market by the nose.
Other industry stocks have not been far behind as their earnings have grown 50 to 60 percent quarter-on-quarter.
Satyam Computer Services Ltd stock multiplied three-and-a-half times, Wipro Ltd a post-stock-split three times and NIIT Ltd twice since December 31.
Smaller players like Mastek Ltd have seen their stock price rise nearly seven-fold, VisualSoft (India) Ltd six-fold and Sonata Software Ltd , which listed in January, three-fold.
HIGH PE NO DETERRENT
Analysts said high PE multiples for the sector did not necessarily mean the stocks were overpriced or that a low PE indicated a bargain.
Those contacted by Reuters forecast the overall industry PE for 1999/2000 (April-March) between 60 and 70, with Infosys's between 95 and 110, NIIT Ltd's between 52 and 63, Wipro's between 110 and 115, Satyam's between 61 and 70 and Pentafour Software and Exports Ltd's between 14 and 17.
``Some stocks that may seem overpriced are not so when PE multiples are adjusted for earnings growth rates,' said Srividya Rajesh, software analyst at Sundaram Newton Asset Management Co Ltd.
An analyst at a British brokerage who did not wish to be identified said that based purely on PE multiples forecasts, BFL Software Ltd with a PE of 34, Aptech Ltd with 26 and Pentafour with 14 could be considered good investments.
``But it doesn't mean that the Infosys or Wipro shares will not see gains in future...as the entire sector performs well, industry leaders will continue to stay ahead,' he said.
LEVERAGING MULTIPLE ADVANTAGES
Analysts said Indian software firms were in the driver's seat as the global demand for software services was growing fast and businesses were increasing the amount of software they outsourced from vendors as it was cheaper than developing it inhouse.
And while Indian firms were always cheaper to outsource from -- at times by 60 to 70 percent -- the quality of their services were as good as the best in the industry, analysts said.
They said most Indian software firms had used the opportunity to fix the ``millennium bug' in computers to establish long-term business relationships with clients.
This, coupled with their agility in moving to high-value, newer technology areas such as e-commerce, Internet, CORBA, infotech-enabled services and Java, ensured that a feared dip in revenues due to a reduction in Y2K projects was overblown.
($1=43.38 Indian rupees)
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