Profits sparkle, shares drag

Rosemary Arackaparambil

MUMBAI: Indian software firms have reinforced their reputation for high

growth with average earnings soaring more than 100 per cent for the second

quarter of 2000-01 (April-March).

But analysts said their share prices were more likely to track sentiment in

global markets in the short term than reward performance or potential.

Most software shares are way off calendar year highs despite strong earnings

growth, mostly tracking declines on the Nasdaq.

The Bombay Stock Exchange information technology index has lost nearly 22 per

cent during July-October, while the benchmark market index has fallen over 17

per cent during the same period.

"The stocks are a shade undervalued given their growth prospects. But

each company has to be looked at differently and has a different level of

sustenance of growth," said Vaze.

Shares face uphill task



Securities firm ASK Raymond James Securities technology analyst Vijay Bhayani
said the sector was trading at an average price-earnings ratio (PE) of 60.7

times. He expected fiscal year 2001 earnings and a PE growth ratio of 0.7.

Wipro is trading at 104.9 times its expected 2001 earnings, Infosys

Technologies at 76.9 times, Satyam at 58.4 times and HCL Technologies at 44.4

times, NIIT 19.5 times and Hughes 67.7 times, he said.

"We expect prices to bottom out in November and then stage a smart

rally, discounting the fiscal year results," he said.

He said large companies would continue to grow faster than the sector and

these would be the first to bounce back in the event of a rally.

Strong earnings growth by sector



A Reuters study of 14 firms that unveiled results for the three months to
September showed net profit rose 131 per cent on an average and sales 55 per

cent compared to the year-ago quarter. The net profit margin rose to 28.33 per

cent from 19.02.

The booming sector is expected to maintain high growth rates, helped by

increasing business in the high margin Internet and e-commerce areas and higher

client billing, analysts said.

"The business momentum is very strong and companies with the operational

capability to execute that business will do well," said Mahesh Vaze,

analyst with Inquire Indian Equity Research.

Internet, e-commerce revenues rise



"Companies are moving up the value chain and are getting good billing
rates," said Priya Rohira, analyst with Pranav Securities.

"There is increasing business for Internet and e-commerce segments

compared to the past and they will remain the drivers in the next two-three

years," she said.

Sector leader Infosys Technologies which beat market expectations with a

122.3 per cent rise in net profit, said revenues from e-commerce increased to

31.4 per cent during the quarter compared to 10.3 per cent a year earlier.

Satyam Computer Services, which posted a 118 per cent jump in net profit for

the quarter, said Internet and e-commerce accounted for 27.1 per cent of total

revenues against 15.4 per cent in the year-ago quarter.

Though most firms had a good chunk of repeat business from clients, many also

added clients during the quarter.

Many also added more staff, raising costs, but their utilization levels are

seen improving over the next quarter.

ASK Raymond's Bhayani said his assessment of the sector's performance (a

study of 16 firms, six different from the Reuters study) showed earnings before

interest, tax, depreciation and amortization grew by 85 per cent.

But the results showed a dichotomy between large and mid-sized firms, he

said, with EBITDA margins of the large firms growing by 5.5 per cent over the

year-ago quarter and smaller firms' margins rising to 22.5 per cent from 22.1

per cent. Other income from gains in foreign exchange fluctuations was higher

for many firms, which earn a majority of their revenues from overseas. The

Indian rupee depreciated by three per cent versus the dollar over the quarter,

and by 5.3 per cent since March 31.

(C) Reuters Limited 2000.