India Tech Shares Perform
Even as Prospects Worsen
By MOHAMMED HADI and ROMIT GUHA
September 12, 2008 6:14 a.m.
Few Indian companies are geared toward Western economies like the country's outsourcing giants. So how is it that they've turned out to be such good investments lately?
The answer is part history and part shortsightedness.
Much comes down to the rupee. The industry generates 60% of its sales in the U.S. -- so exchange rates are critical. In 2007, as money poured into the Indian stock market and the rupee rose sharply against the dollar, the outsourcers fell along with assumptions about how much revenue they'd be bringing back to India.
With the Bombay Stock Exchange's 30-stock Sensitive Index, or Sensex, up 47% last year, shares of the four biggest outsourcers by market cap -- Tata Consultancy, Infosys Technologies, Wipro and Satyam Computer Services -- dropped 13.2% on average.
The rupee has been tumbling since the end of March and the outsourcers are outperforming. They've risen 2% on average compared with a 10% drop in the Sensex.
But counting on rupee weakness to continue offsetting declining business could prove careless.
Fundamentals are deteriorating -- and since outsourcers count many western banks as clients, it's not difficult to see where the trouble is coming from. Things have gotten bad enough in the U.S. banking sector that clients are holding off decisions to spend new money.
The outsourcers have acknowledged as much recently. Contract renewals are taking a hit with billing rates unchanged or lower, compared with increases of 2% to 3% just a few quarters ago, Manoj Mohta at research firm Crisil says.
And an old crutch for investors -- that the companies are diversifying away from the hard-hit U.S. -- probably won't hold up for long. The diversification has led them mostly to the U.K., which accounts for about 18% of revenue and isn't in particularly good economic shape either.
Foreign exchange could work against the companies there as well. On Friday, Infosys Chief Financial Officer V. Balakrishnan said the British pound's recent weakness against the dollar may hurt U.S. reported earnings this quarter. Of the big four, only Tata Consultancy, with no shares listed in the U.S., doesn't have that problem.
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