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Software firms on growth track, say analysts

After exceeding analysts' expectations by posting triple-digit earnings in the October-December quarter, India's top software services companies are expected to maintain turbo-charged growth rates.

Analysts say that the results reinforce the view that their global cost competitiveness and high quality of work will keep India's leading software firms growing despite any decline in infotech spending in the US.

US accounts for about 60 per cent of India's software services exports, which are expected to exceed $6 billion this year, up more than 50 per cent from last year.

"The business parameters of software companies such as new clients and billing rate increases remain strong," says Narender Nagpal, head of research at brokerage Indosuez WI Carr.

For the past October-December quarter, net profit of Infosys
Technologies Ltd surged 125 per cent year-on-year to Rs 1.66 billion, Satyam Computer Services' profit rose 142 per cent to Rs 875.09 million and Wipro Ltd posted a three-fold jump in profit to Rs 1.89 billion.

Most top Indian software companies increased their billing rates in the latest quarter. Wipro's billing rates rose 17 per cent from a year ago while Satyam Computers rates increased for the first time in several quarters.

Infosys, Satyam and Wipro are India's top three listed software services exporters.

"Despite lower growth in infotech spending, leading Indian companies should keep doing well due to their strong business relationship with existing clients," says Nagpal.

Yet analysts say that despite the strong earnings growth, investors are unlikely to turn aggressive buyers of software stocks, as they would wait for a clearer picture to emerge of the US economic outlook.

Evidence that the world's largest economy showed signs of growth, extending the unprecedented current growth spurt into an 11th year, would influence the business prospects of Indian companies and reassure investors of their sustained high growth, analysts say.

Most Indian software stocks have outperformed the market in the past two weeks after posting better-than-expected results.

In the two weeks through Friday, shares of Infosys gained seven per cent, Satyam eight per cent and HCL Technologies jumped 13 per cent.

By comparison, the Bombay Stock Exchange benchmark 30-issue index rose about two per cent in the same period.

Revenue growth of the software service firms in the third quarter beat market expectations. Infosys posted a 136 per cent rise in its revenues to Rs 5.51 billion, Satyam's revenues jumped 87 per cent to Rs 3.33 billion, while Wipro reported a 39 per cent increase to Rs 7.80 billion.

"Size really matters and this is a clear trend that has emerged for software companies. Big companies have shown that they are able to win larger orders, get better rates and ensure more productivity," says P Krishnan, country manager at Carlson Investment Management, a foreign institutional investor.

Analysts say that the business scenario was in favour of leading Indian software firms as their client base was made of large, well-established global businesses and not smaller, fully Internet start-ups.

Some of the biggest clients of Indian software majors include Boeing Co., Cisco Systems, Nortel Networks, General Electric, Lucent Technologies and RSA Security.

"The most important thing that comes out from these results is the strong demand outlook as mentioned by the management of leading software firms," says a software analyst at a leading foreign brokerage.

Adds Krishnan, country manager at Carlson Investment Management, "Top-line companies should see no serious threat to their performance over the next one year even if the US economy slows down."

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