Cazenove cuts software sector rating

MUMBAI: Cazenove & Co said it has downgraded its rating for the Indian

software sector to underweight from overweight amid signs of the US economic

slowdown beginning to impact domestic software companies. In a report dated

March 27, Cazenove said: "Contrary to our earlier (and long held) view that

a slowdown in the United States is not going to affect them, we have in fact

seen signs of weakness emerging in Indian software companies."

Cazenove said the impact on Indian software companies includes delayed

decision making by clients, a reduction in new projects and onsite requirements,

pressure on billing rates for onsite projects and slowing IT investment by

telecom, Internet, manufacturing and finance sector clients.

"We agree that in the long run the Indian offshore model offers an

inherent cost/quality advantage, but on a six-month view we are sure of more

negative news flowing in from the companies," the report said. It said the

effect of the US slowdown will not be felt in the just completed January-March

quarter, but will in the next two quarters.

Cazenove said it had reduced revenue growth targets for Indian software firms

by 4-60 per cent for the year ended March 2002 and earnings-per-share targets by

8-43 per cent. The research firm said it was maintaining its "buy"

recommendation for Infosys Technologies and "hold" rating for Digital

India , but was recommending investors to "reduce" their holdings in

all Indian software firms.

"In terms of valuation, we foresee a 25-30 per cent fall in the price of

HCL Technologies, Wipro and Satyam Computer Services. For mid-sized companies

the scope is much more," it said. Cazenove said it had a six-month price

target of Rs 5,500 for Infosys, Rs 1,070 for Wipro, Rs 200 for Satyam Computer

and Rs 325 for HCL Technologies.

Wipro's growth rate will be affected by its exposure to telecoms and R&D

requirements, but HCL Technologies will be worst hit because of overexposure to

technology product companies, it said. In late afternoon trading on Monday, HCL

Technologies' shares were down 11.6 per cent at Rs 326, Wipro's shares were down

7.6 per cent at Rs 1,233, and Satyam Computers’ shares were down 0.8 per cent

at Rs 235.20.

(C) Reuters Limited 2001.