Hi Kemble! Hasn't Michael targeted India as an area of emphasis/expansion for Dell? I thought this was interesting information about India. :)Leigh
"India is becoming the toast of high-tech these days. Its cities sprout gleaming R&D facilities for companies such as Oracle, Microsoft, and Sun. And according to NASSCOM, the association of Indian software companies, the country's exports of software and computer services have soared from $150 million eight years ago to $3.9 billion in 1999 -- 61% of which goes to U.S. companies."
businessweek.com
STREET WISE
BY ALEX SALKEVER MARCH 28, 2000
Recognizing Cognizant as a High-Tech Bargain
The Nasdaq-listed programmer is an often overlooked play in India's rising software industry
India is becoming the toast of high-tech these days. Its cities sprout gleaming R&D facilities for companies such as Oracle, Microsoft, and Sun. And according to NASSCOM, the association of Indian software companies, the country's exports of software and computer services have soared from $150 million eight years ago to $3.9 billion in 1999 -- 61% of which goes to U.S. companies.
In fact, Indian programmers have become troubleshooters and suppliers of custom programming for U.S. companies that don't want to hire expensive help at home. It's no surprise, then, that the few Indian high-tech companies listed on the Nasdaq have shot to nose-bleed valuations. Consider Bangalore-based Infosys (INFY), a bellwether Indian stock that gets its cachet both from being Indian and from doing Net work. With a mere $121 million in 1999 revenues and decent but not spectacular profits, Infosys is trading at a gravity-defying price-earnings ratio of 855, with a market capitalization of $17 billion.
If buying into such an expensive stock gives you pause, there's a better way to play the India software card. Cognizant Technology Solutions (CTSH) in Teaneck, N.J., has built a strong custom software practice using a business model it calls offshore-onshore. About one-third of the company's tech staff works at customer sites in the U.S. or other Western countries, while the other two-thirds work in Chennai (formerly known as Madras), where the company has its Indian headquarters. With this split structure, Cognizant execs claim they can finish projects faster, since their Indian presence keeps projects humming 'round the clock. "We can significantly compress time to market," says Cognizant CEO Kumar Mahadeva.
BIG NAMES. The company now has 57 clients, with the largest concentration in health care, insurance, and information services -- and including marquee names such as Nielsen Media Research, Northwest Airlines, Body Shop, and electronic financial services concern First Data Merchant Services. The bonus for investors is that roughly 30% of Cognizant's $89 million in revenues comes from e-commerce projects, many for its existing clients. So, Cognizant looks a lot like Infosys, but with somewhat less exposure to the unpredictable Indian legal and political system.
Cognizant clients give the company glowing reviews. "The big concern we had was the offshore model," says Anthony Gentile, director of information services at Rocky Mountain HMO in Grand Junction, Colo. "We heard that this model was risky, that these people were in India, and it was hard to talk to them. That never materialized. I couldn't have been happier with the performance and the low cost."
The HMO brought in Cognizant to help integrate antiquated database and information-management software, and convert old data into a format compatible with the new systems. Now, says Gentile, his company is considering Cognizant for Web-services jobs. Adds Kim Ross, chief information officer of Nielsen Media, which has used Cognizant since 1995: "They bring state-of-the-art knowledge to the party."
UNDERPRICED. Cognizant has also inked deals with designers of e-commerce sites, such as Viant, to help drum up Web business. Mahadeva is intent on growing from within, rather than by acquistion, as Cognizant competitors iXL and Whitman & Hart have done. Still, the company's 1999 revenues rose 52%, and it profits jumped 86% (to $11.2 million) gains that compare favorably to those produced by Infosys. Compare the p-e ratios of the two companies, moreover, and Cognizant looks like a bargain: It's trading at a p-e of 118.5, about one-seventh that of Infosys. So far, the markets have failed to recognize Cognizant and Indian premium.
Cognizant even looks underpriced compared with some U.S. competitors. Consider Sapient (SAPE), which Mahadeva views as a competitor. At 91 or so, Sapient's stock is well off its 52-week high of 151. Even so, it enjoys a p-e of 190, after producing 1999 revenues of $276.8 million and profits of $30.1 million. Sapient's revenues grew twice as fast as Cognizant's last year, but does that justify its much higher p-e?
Probably not over the long haul. Analysts think Cognizant's access to cheap, abundant labor and its experience with offshore-onshore operations will give it an advantage down the road vs. companies that largely operate in a Western labor market. Furthermore, the company's expertise in updating back-office operations will come in handy as more of its customers do costly conversions to Web-based models. "The majority of computing today, even in the legacy world, gets done in the back office. Why wouldn't that continue in the future?" asks Joseph Buttarazzi, a senior analyst with Adams, Harkness, Hill.
WHY SO CHEAP? Cognizant is the only company of the 15 Buttarazzi tracks in its industry that he has given a strong buy rating. He expects Cognizant to earn 75 cents a share in 2000 and 99 cents a share in 2001, vs. 1999's 58 cents. That's in line with FirstCall/Thomson Financial consensus estimates. SG Cowen Managing Director Moshe Katri has a price target of $75 on the stock, which closed on Mar. 27 at $68.75.
So why is Cognizant cheap for its sector? It's small enough that few analysts cover it, and it gets light media coverage, too. Moreover, the market has been awash lately in high-profile IPOs of e-business service companies. And one of Cognizant's biggest clients, IMS Health, a service company for the drug industry, owns 60% of the company, so few shares are lying around to buy.
The lack of supply also results in lack of demand as Cognizant's institutional holders don't often sell their shares. Daily volume is generally light, with fewer than 500,000 shares changing hands. But the stock is liquid enough to buy if you want -- and provide a way to ride the Indian roller coaster from the relatively safe confines of New Jersey.
Salkever is a staff reporter for Business Week Online in New York |
