Nearshore Americas

Are India Software Services Companies Too Expensive?

SOURCE: Reuters

 Shares in export-driven Indian software services companies are trading near their peaks on expectations for rising outsourcing demand as companies and governments around the world look to cut costs.

Risks to the sector come from rising wages, uncertainties linked to the debt problems in Europe and wide currency swings.

Last week, Tata Consultancy Services (TCS) (TCS.BO), the country’s top outsourcer, posted a 21 percent rise in quarterly profit and said it was seeing strong demand.

The result was in sharp contrast to Infosys Technologies (INFY.BO), seen as a trendsetter for India’s $60 billion IT-services industry, that reported a rare drop in quarterly profit.


Analysts are betting troubled and recovering economies will be under pressure to get many services such as accounting, healthcare and billing done elsewhere to cut costs at home.

“As companies get careful on their costs, demand for outsourcing is only going to get better,” said Shashi Bhusan, research analyst at brokerage Prabhudas Lilladher.

“It seems the worst is behind us in Europe. There could be sporadic incidents, but there is no big threat to order flow from the continent,” said Bhusan, who has a buy rating on TCS and Infosys and an accumulate rating on Wipro.

TCS and Infosys are hovering near all-time highs, while third-ranked Wipro (WIPR.BO) is close to its highest level in a decade.

Since the financial crisis struck in September 2008, these companies have roughly more than doubled, outperforming global peers such as Accenture (ACN.N) and IBM (IBM.N) that gained 3.1 percent and 11 percent respectively.

According to StarMine, 18 analysts rate Infosys a strong buy and 9 rate it a buy while 13 had a hold with the 12-month mean target price at 3,065.8 rupees — a potential upside of 11 percent from current levels.

The stock hit a record high of 2,911.55 rupees on July 12 but has since slipped to 2,757.60 rupees.

A month ago, 16 analysts rated the stock a strong buy, while 10 analysts recommended a buy and another 10 had a hold on it.


“I would advise my clients to stay away from these stocks for now,” said Bangalore-based Rakesh Rawal, who manages $1 billion as the head of private wealth management at financial services firm Anand Rathi. “Valuations are very expensive.”

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Rawal expects the rupee to strengthen, which could dent profit margins for the sector.

Infosys is trading at 21.2 times 12 month forward price/earnings according to Starmine’s SmartEstimate, which places more weight on recent forecasts by top-rated analysts.

TCS and Wipro are trading at multiples of 19.3 times and 18.1 times respectively.

Accenture (ACN.N) and IBM (IBM.N) trade at 13.6 times and 11 times their 12-month forward earnings respectively. ($1=47.1 rupees)

Kirk Laughlin

Kirk Laughlin is an award-winning editor and subject expert in information technology and offshore BPO/ contact center strategies.

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