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ECONOMY: TECH STOCKS
Fall From Grace
Spectacular profits have not prevented the software
majors from taking a hammering at the stock market
By Malini Goyal
Infosys annual net profit up 114 per cent;
its stock price slumps 16.31 per cent. Satyam Computer's net profit zooms
134 per cent; its stock price slides 1.26 per cent. Global Telesystems'
net climbs 122 per cent; its stocks dips 8.7 per cent.
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GRIM OUTLOOK: Infosys Chairman N.R. Narayana Murthy comes
to grips with the stock slide sparked by his company
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These are bad days
for software companies. So much so that even a good news hides a bad one.
Despite good financial performances, infotech majors are getting the wrong
end of the stick in the stock market. Big and small, weak and strong,
stock after stock has taken a beating. Once the prized possession of the
nouveau riche, the shares of Infosys Technologies, Wipro Ltd, Satyam Computer
Services and HCL Technologies have slid by as much as 16 per cent, the
daily limit. "Infosys financial results have set the tone for software
stocks," says Mahesh Vaze, analyst in Mumbai-based Motilal Oswal
Securities. "It is not so much the immediate results as what Nandan
Nilekani (Infosys MD) said about the future results," says an analyst
with an MNC brokerage firm.
 There's
a reason why punters have become so aggressively bearish on Infosys. There
was virtually no indication of the slowdown from the company. "The
Infosys management kept telling us as late as March 15 that 50-60 per
cent growth would be achievable," says a Mumbai-based analyst. So
when the profit warning-forecast of 30 per cent revenue growth in the
financial year 2001-2002 as compared to 114 per cent growth in 2000-2001-came,
it took everyone by surprise. The hammering that followed was more due
to shock. And when Infosys stocks slipped, others followed.
Lack of specific statements from Satyam on the
company's future made matters worse. After the Infosys warning, few had
any confidence left in the other IT scrips. Thus followed a rapid decline
in IT stocks. Satyam Computer Services Chairman B. Ramalinga Raju calls
it a correction in the IT stocks. "The unrealistic expectations about
the phenomenal growth that made technology stocks rise sharply towards
the end of 1999 and early 2000 are now swinging the other way," he
says. Satyam posted an impressive 134 per cent growth in net profit in
2000-2001 but its stock price has failed to perk up.
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"Unrealistic
expectations that made tech stocks rise are swinging the other
way."
B.R. Raju, Chairman,
Satyam
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Ditto for Infosys, whose stocks have taken a
beating ever since the announcement of results on Wednesday. Managing
Director, President and Chief Operating Officer Nilekani blames the US
economic slowdown for the dampening effect in India. "Most of the
companies in the US have seen negative growth and are shrinking, so our
performance is okay," he says. Industry stalwarts may not admit it
but the slowdown could be much more than the ripple effect of the US slowdown
or the bearish Sensex. Global Telesystems' fourth quarter net profits
are down 32 per cent. NIIT has already put out a profit warning. Bottom
lines are shrinking. Growth is under pressure.
Nobody said a word while the going was good,
but now experts and analysts have started questioning the business models
of IT majors. Says Manoranjan Mohapatra, executive vice-president and
coo, Hughes Software Systems: "A lot of Indian companies concentrated
on the onshore, low-end, non-core work." Many Indian companies landed
in the US saying, "You spend so much on your back-end activity. Give
it to us, we will do IT cheaper." Not many developed business models
around product development which is at the upper end of the value chain.
"Preferring to work on current generation activities like IT-enabled
services, they were not futuristic in approach," he adds. This meant
when the crunch came such non-core functions were the first to be axed.
A large portion of the work was done onsite
(sending employees to work at the clients' premises). Close to 51 per
cent of the Infosys revenue comes from such onsite jobs, while Satyam
gets 42 per cent, Wipro 52 per cent and Tata Consultancy Services 50 per
cent.
The slowdown has had two serious repercussions
on the Indian software majors. With the US firms resorting to cost-cutting,
the Indian companies' onsite projects were the first to be affected. Besides,
the Indian companies that resorted to hiring droves of executives for
onsite projects have been saddled with benched IT professionals. The Infosys'
utilisation rate of employees has come down by about 5 per cent to 67.4
per cent this year.
What is also worrying analysts is the overdependence
of the Indian software industry on the US market. Consider the numbers:
Infosys earns close to 74 per cent of its revenue from the US, Wipro 64
per cent, Satyam 74 per cent and Polaris Software 67 per cent. Focused
and closely wedded to the US markets, Indian companies have little cushioning
when the US economy reels. Reluctant in the past, now many will be forced
to explore new business opportunities in Europe and Japan.
No doubt the US slowdown is bad news but Indian
software companies are also looking at the positive side. Cost-cutting
and layoffs in the US will mean many job functions becoming outsourced.
A host of software major chiefs like Azim Premji of Wipro and Nilekani
are eyeing offshore projects. Agrees Harris Miller, president of the Information
Technology Association of America: "There are indications that the
offshore revenues will increase. Since the Indian IT industry is able
to offer good value." Already, Infosys' offsite revenues have inched
up a marginal 2 per cent.
As the software industry matures, the stock
market will have to temper its expectations. Triple-digit growth is not
sustainable for long. Says Chairman and Managing Director of Visual Soft
Technologies D.V.S. Raju: "Financially sound and proven companies
will grow, though it will not be at the same speed as in the past."
Speed today is not the greater concern. Growth is.
-with Stephen David and Amarnath
K. Menon
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