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Technology shares seen steady in 2005

Crisil MarketWire in Bangalore | January 04, 2005 11:41 IST

Key information technology stocks may remain steady in calendar year 2005 because of strong business prospects, analysts and brokers said.

Any major upside in the short term is unlikely because of sustained appreciation in the rupee against the greenback, no fresh triggers, and lack of any significant rise in billing rates, they said.

"There is unlikely to be any re-rating of the PE (price to earnings) multiples and business will perform better than stocks. This would be the key difference between 2004 and 2005," said an analyst with a domestic fund.

He said that "most of the positives" have been factored in, and therefore 2005 is unlikely to see a sharp rise in share prices, as seen in 2004.

An analyst with a foreign brokerage said IT stocks are likely to remain subdued in the short-run on lack of fresh triggers, no significant rise in billing rates, and a comparatively weaker third quarter, or October-December.

Traditionally, the October-December quarter is comparatively weaker for Indian software companies because of the large number of holidays in the US.

The sustained rupee/dollar volatility and its effects on IT stocks in 2005, after the gains seen in 2004, prompted investment bank CLSA Asia Pacific Markets to downgrade the sector on December 1, 2004.

Since October, the rupee has gained near 5.5 per cent against the US dollar. Indian companies depend on the US for over 70 per cent of their revenues. Companies have said that a 1 per cent appreciation in the rupee against the greenback may hit margins by 30-40 basis points.

Shares of Indian software companies gained significantly in 2004, powered by good business pick-up since the second-half of 2003.

In calendar year 2004, the National Stock Exchange's CNX IT Index rose near 25 per cent, reflecting the increased confidence in the sector. The momentum was mainly due to the rising status of India on the world map as an outsourcing destination.

Top-tier companies reported near double-digit growth in volumes quarter-on-quarter, and hired thousands of IT workers every month as demand remained robust.

The increased business visibility also encouraged companies to raise their earnings outlook, up from the numbers indicated in the beginning of the current fiscal. For example, Infosys Technologies Ltd. revised its earnings outlook for 2004-05 twice since April.

2004 also saw the top three Indian companies -- Tata Consultancy Services, Infosys Technologies, and Wipro Ltd., breach the $1 billion-mark in revenues.

However, the year marked the widening of the gap between the top-tier companies and the rest of the pack, said an analyst with a foreign brokerage. This was because overseas clients increasingly looked at the size of the companies, their ability to scale-up, and branding to decide on their local vendors.

During the year, industry officials also saw their bargaining power return, albeit in a small way. Billing rates remained steady, though companies were not able to push up their average rates.

Infosys Technologies and Satyam Computer also announced their respective plans for a secondary American Depository Receipts issue.

In 2005, Indian companies may increase their presence in Europe as part of their plans to de-risk themselves from the volatility of the greenback.

Industry officials expect the demand for Indian software services and business process outsourcing services to remain strong in 2005. The lull in opposition towards outsourcing has also aided their confidence.

However, even as demand may remain strong, industry would have to grapple with a variety of issues that could impact profitability. The continued appreciation in the rupee and wage inflation would continue to remain bugbears for the sector.

Top-tier companies may expect to get better billing rates for their services and push up the average rates, atleast by the second-half of the year.

The top three companies would also hope to break into the big league by securing large contracts. Though these companies see a strong order flow, they have been handicapped by the inability to secure large orders, say in excess of $100 million, which could leap-frog them into the big league.

In a recent note, CLSA Asia-Pacific Markets said, "Companies continue to invest for strong growth in 2005 and deal flows, client visits and signings all indicate that the expected growth numbers will be achieved."

Infosys Technologies and Tata Consultancy Services are competing for a large portion of a ABN Amro outsourcing contract. Though the deal size is not unknown, industry officials peg it northwards of $500 million.

ABN Amro is likely to decide on its vendors within a month, and a significant win here could be the perfect start for these companies in 2005.

Also, the New Year would continue to see companies sustaining their hiring momentum. An indication of the same came from Satyam Computer Services Ltd.

Chairman Ramalinga Raju, when he said earlier this week that the company hopes to have a workforce of 50,000 in two years, up from 20,000 at present.

The year 2005 may also see top-tier Indian companies kick-start their overseas development centres in a big way, as they look at cheaper destinations like China for cost-efficiency.

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