IT services R&D will touch $4 b: Merrill Lynch

MUMBAI: Analyst firm Merrill Lynch has predicted Indian software services firms could see revenues from research and development related services for technology companies rising nearly four times to $4 billion by 2005. In a report dated April 20, Merrill said Indian software firms were focusing on higher value-added business like core technology related services because they felt pressured by new supply for their traditional low-end work from countries like China, Mexico, Russia and the Phillippines.

Currently Wipro and HCL Technologies together account for about half of India's core technology revenues estimated at $800 million-$1 billion last year, it said. "We believe that the reason why these two companies have chosen the path of core technology is because of their heritage as firms involved in system-level hardware design and manufacturing which we view as a competitive edge," Merrill said.

It said other companies involved in core technology work included Hughes Software at a smaller level and private players like Sasken and MindTree. "The next few months and quarters are difficult to predict for this business due to economic uncertainty. In the current more difficult economic conditions, global core technology development may be delayed, postponed or slower than in the past," it said.

"Longer term, however, we feel core technology may offer a more stable and potentially more scalable business model than traditional software services," it said. Merrill said it favored Wipro, followed by HCL Technologies in the core technology sector, but emphasized that Infosys Technologies despite a lower core tech presence was its all time sector favorite.

Merrill cited an international peer group of companies like Alten, Altran Technologies, GlobeSpan Inc, Aware Inc, InSilicon Corp and Artisan Components and said these were trading at an average P/E of 41.1 times compared to an average 25.2 times for Wipro, HCL Tech, Infosys and Hughes.

"This differential suggests to us that Indian core technology providers, which we believe are fundamentally better positioned than many of their global counterparts, appear attractively valued," it said.

(C) Reuters Limited 2001.