The growth of the technology-outsourcing business in India is a success story of the early 21st century. India's National Association of Software and Service Companies reports that total IT-services 'exports' from India should reach $23.9 billion in 2006.
The number of Indian workers employed by IT services companies has grown by over one million in six years, to 1.3 million in 2006. Banc of America analyst Abhishek Gami expects 25% to 35% revenue growth this year in the Indian IT services area versus 6% growth in the overall sector.
Such rapid growth in Indian IT services has attracted a lot of competition and also created growing pains for the industry. The presence of IT multinationals like International Business Machines and Electronic Data Systems in India is putting margins and earnings under pressure.
Labor is another issue: Demand for highly skilled workers is fast outpacing supply, while at the same time companies are struggling with wage inflation and heavy worker-attrition rates.
Despite these challenges, Gami is bullish on Cognizant Technology Solutions, a one-time unit of Dun & Bradstreet. Though headquartered in Teaneck, N.J., Cognizant has the majority of its operations in India. Gami expects Cognizant to post nearly a 50% increase in revenue this year, while he thinks its top-tier competitors, Infosys Technologies and Wipro are likely to turn in sales growth of 30% and 33%, respectively.
Shares of Cognizant sell for a hefty 46 times their Thomson IBES 2006 consensus forecast. Tempering this multiple somewhat is a consensus estimate of 34% annual earnings growth over the next three to five years.
Dylan Cathers, an equities research analyst at Standard & Poor's, is more partial to Infosys, which has corporate headquarters in Bangalore, India, and U.S. headquarters in Fremont, Calif.
Cathers points to a strong balance sheet, wide margins, growth prospects and the company's expansion into high-value areas like software development, systems integration and business process management. Infosys sells for 31 times its 2006 consensus earnings forecast and analysts expect 28% annualized earnings growth over the next three to five years.
Also moving up the value-added chain is Wipro. Cathers says this company, which has headquarters in Mount View, Calif., and Bangalore, is adding breadth to its services offerings more through acquisitions than by following the reinvestment model of Cognizant Technology Solutions.
For example, Wipro recently acquired NewLogic Technologies, of Austria, which offers system-on-a-chip engineering services. Another recent deal was the purchase of mPower Software Services, a payment-processing company based in New Jersey.
Shares of Wipro are available to American investors as American Depositary Receipts, but both Cathers and Gami are neutral on Wipro. While they expect the company to grow and take market share, they feel that it is fully valued at its current price.
Of the smaller, second-tier IT services companies, Cathers said Satyam Computer Services is attractive. Relative to its rivals, Satyam sells for a modest 21 times its 2006 consensus forecast, for the fiscal year ending in March 2007.
Indian Investment Ideas
|
Company |
Price |
Change From 52-Week High |
2006 Estimated P/E |
EPS Growth* |
Market Value |
|
Cognizant Technology Solutions |
$63.92 |
-8% |
46 |
34% |
8,974 |
|
Infosys Technologies ** |
$77.75 |
-9 |
31 |
28 |
21,525 |
|
Satyam Computer Services ** |
$33.30 |
-25 |
21 |
24 |
5,432 |
|
Wipro** |
$12.58 |
-19 |
32 |
24 |
18,001 |
P/E: Price-to-earnings ratio.
EPS: Earnings per share.
*Annualized; projected over the next three to five years.
**American Depositary Receipts.
Sources: FT Interactive Data, Reuters Fundamentals and Thomson IBES via FactSet Research Systems
