Epaper
NEW DELHI: Once considered the hot stock of the Dalal Street, technology stocks now seem to be losing their charm. In the last 12 months, while the BSE Sensex zoomed 39.8%, all top IT stocks be it Infosys, TCS, Wipro or Patni declined by double-digit percentages. Call it the rising rupee, impending taxes or analyst outlook, the IT sector has to work wonders to bring back its magic touch.
Infosys Technologies, the bellwether of Indian IT stocks, which has many a times swung the declining Sensex to higher levels by itâs scrip alone, has been trading at a decline from its highs since past one year. The price of the stock has waned by a whopping 26.8% on the BSE. The stock was trading at Rs 2,193.75 on December 1, 2006. It has slid to Rs 1,604.05 as on December 1, 2007. As of end September 30, 2007, the Infosysâ market capitalisation stood at Rs 108,116 crore. It dipped to about Rs 89,000 crore in last week of November before bouncing back to Rs 1,22,115 crore on December 4, 2007. Infosys declined to comment on stock movement but said it has managed to maintain its margins.
Indiaâs largest IT company, TCS, which has revenues of over $4.3 billion and over 1,00,000 employees is also seeing a decline on the BSE. TCS scrip has declined 14.56% on the BSE to Rs 1,013.95 from Rs 1,186.80. TCSâ market capitalisation has declined by a whopping Rs 13,098 crore from December 1, 2006, till Tuesday. All top four IT companies-TCS , Satyam , Infosys and Wipro-are included in the Sensex which comprises 30 largest and most traded stocks on the BSE.
But the Sensex, in contrast , has been on a stellar show since last year. The Sensex has zoomed from 13,844 level since December 1, 2006, to 19,363.19 as on December 1, 2007, a gain of 39.8%. The Wipro stock has declined 23.4% eroding almost Rs 140 from its stock price as on December 1, 2007. Wipro has shed Rs 14,415 crore in market capitalisation since last year.
Satyam is the only stock which shows a single-digit decline at 5.76%. But the Hyderabad-based company has also lost Rs 662 crore in a market capitalisation since December 1, 2006. As compared, Patni Computer Systems fell by 19.27%. Patni stock was buoyed in the medium term after talks of a stake sale to a private equity firm but the stock fell as the reported stake sale was called off.
Experts peg the decline to a change in outlook of investors after the rise in rupee and crash in the US subprime market. Though many companies have been able to maintain margins by increasing productivity and efficiencies, investors and analysts are not too sure they will be able to maintain them in the future quarters too.
According to Gartnerâs senior research analyst Arup Roy: âRising rupee will force Indian offshore IT service providers to renegotiate billing rates. This erodes the price differential edge enjoyed by these companies and could make them less competitive compared with external service providers (ESPs). Margin erosion will also make it difficult for them to hire and retain skilled workers.â
Most companies depend heavily on the US financial sector (this accounts for about 60% of the work that Indian IT companies do), which is in a bit of turmoil. Though, analysts expect more outsourcing as a slowdown in US economy may reduce IT budgets of companies and they will send work to India to cut costs. Though US-India business lobby groups believe that the rhetoric against outsourcing may gain fervour in the coming months.
This could delay large outsourcing deals from the US. The impact of taxes in India if the government fails to renew the STP tax-sop scheme (which is ending in March 2009) may also show its impact by Q1 and Q2 next fiscal. All this will change investor outlook in IT stocks further.
Rupee has been on a rise against the dollar and the impact is clearly visible. Although large Indian IT services companies do manage to offset the impact on margins by currency-hedging activities, many still suffered operating margin erosion.
At a recent JP Morgan conference last month, investors said they are shifting from IT stocks to real estate and infrastructure which offer better prospects. âEarlier margins of IT companies were in the 30% range. Now they are in the 20âs and next year investors fear a further erosion.
But investors are also interested in KPO like businesses which offer better margins,â says Avinash Vashishtha, CEO of Tholons, an offshore advisory firm. Escalating salary costs which amount to 65% of entire costs base of IT sector is also responsible for margin erosion, say experts. As of now, at least things look pretty gloomy for the technology players.
Courtesy: Economic Times
