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Outsourcing boom pumps up Indian tech shares

Denny Thomas and Anshuman Daga in Mumbai/Bangalore

Investors are flocking to India's software firms again, attracted by a boom in the outsourcing business that has boosted prospects for the sector.

Market leaders Infosys Technologies, Satyam Computer Services and Wipro Ltd are likely to be favoured and should build on recent gains, analysts said.

The infotech index has already jumped about 21 per cent in the past month, compared with a 9.5 per cent rise in the blue-chip index, and appears set to increase more.

"The focus will continue to be on frontline stocks which are likely to benefit the most from greater outsourcing business," said London-based Sam Mahtani, global portfolio manager at F&C.

Analysts expect software shares to outperform the market as industry leaders are seen winning business from a range of overseas firms that are increasingly outsourcing their software services and back-office operations to low-cost centres in India.

"Hiring numbers, new client adds, quarter-on-quarter revenue growth and earnings revisions are indicators of the improvement in business momentum and rising confidence in the stock market," JM Morgan Stanley said in a recent report on local firms.

Leading the pack of investors are foreign funds, whose net purchases in Indian stocks totalled $96.8 million in November, the highest monthly investment since March this year.

The funds were net sellers of about $124 million in October.

"We are upbeat on the sector," said Bahrain-based Hemant Kulkarni at TAIB Bank, who manages $80 million in Indian shares.

Bellwether companies such as Infosys and Satyam, which have made low costs their competitive advantage, are among analysts' top picks.

Infosys shares, now trading at a 11-month high of Rs 4,561.35 ($94.5), rallied 17.8 per cent in the past month, while Satyam jumped 17.6 per cent to Rs 277.80 in the same period.

Wipro, the sector's No 3 exporter, has risen about 26 per cent since early November after it struck a deal of about $70 million annually along with rival Tata Consultancy Services to manage computer networks for Lehman Brothers.

"Rising overseas orders coupled with stability in pricing should positively impact earnings," Kulkarni said.

A threat of a war earlier this year between India and Pakistan led to cancellations of visits by software clients, pulling down the sectoral index as much as 28 per cent.

Software shares were also among the worst-performers in 2001.

Growth to accelerate

The sector, which bucked a global slowdown last year, is seen posting faster-than-expected revenue growth this year.

"We are cautiously optimistic about recording higher growth in the next financial year because of a rebound in the US economy," Kiran Karnik, president of India's main software association, told Reuters earlier this week.

The industry expects 30 per cent growth in 2002-03.

India's software services exports, which bank on a growing pool of low-paid engineers and English-speaking graduates, rose 29 per cent to about $7.5 billion in the past year ended in March.

Infosys, India's No 2 software services exporter after the privately-held Tata Consultancy Services, raised its full-year sales outlook in October to 30 to 31 per cent growth in dollar terms from the earlier 17 to 20 per cent.

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