The tables are turning in India’s glamorous information technology sector. Some smaller niche software exporters have garnered more attention of investors than blue-chips such as Infosys Technologies Ltd., Tata Consultancy Services Ltd. and Wipro Ltd., especially after their modest financial performances in the six months through March 2011.
In the last three months to date, shares in medium sized IT companies KPIT Cummins Infosystems Ltd. are up 15%, Hexaware Technologies Ltd. is 22% higher and outsourcing firm eClerx Services Ltd. has gained 22%. In contrast, sector heavy weights TCS – India’s largest software exporter – is up 3.3%, second-largest outsourcer Infosys is down 7.5%, while Wipro is 1.2% higher. The benchmark Sensex rose 3.5% during the period.
Sustaining their winning streak, Monday, shares of mid-cap companies KPIT Cummins closed up 3.8% at 170.05 rupees ($3.78), while Hexaware was up 2.5% at 64.50 rupees. Larger players Tata Consultancy closed up 1.0% at 1,153.25 rupees, while Infosys Technologies was down 0.3% at 2,780.20 rupees. The benchmark index was down 0.2%.
The small-sized Indian technology companies were trailing their larger counterparts in growth through a greater part of the global slowdown that began in 2008. Most of them lacked the scale to deal with the severe cutback in IT spending by global clients and incurred heavy losses.
And in 2010 the smaller firms didn’t reap the benefits of a peak in outsourcing demand for India’s IT sector as clients cleared backlogs of projects which they had deferred for nearly two years. They lacked exposure to the financial services sector that led the turnaround and faced competition with the larger firms, which started eyeing low value deals, too.
But as growth is returning to the near pre-recession levels, the large companies are expected to focus on high-value deals, leaving room for smaller peers to spread their wings, analysts say.
Polaris Software Lab Ltd. and Hexaware Technologies Ltd., for instance, recently won contracts that strengthened investor optimism in mid-cap companies.
Monday, Hexaware Technologies said it won a $25-million contract to offer technology infrastructure solutions to a European client.
The key winning strategy for the smaller IT companies is their focus in offering technology solutions for specific sectors which are seeing increased demand, says Dipen Shah, senior vice president at Kotak Securities.
At the same time, volume of outsourcing work has tempered down for India’s largest IT companies as big-ticket projects drew to a close.
Larger IT firms like Infosys and Wipro are also beset with structural problems and trying to retool their sagging business units. This is keeping investors away from their stock.
Investors are now betting on the cheaper and smaller-sized stocks which typically trade at four to five times their projected yearly earnings and could generate higher returns when compared with the larger peers, which are trading at 20-22 times, say experts.
This has led to bridging the gap in the valuations between the large and small IT companies, they say.
Amid the investor optimism, analysts believe there are still near-term challenges for smaller companies.
Increased wage costs, needed to retain talent, may eat into the profitability of smaller companies more than in those of larger firms in the shorter term. Further, clients may find it easier to work with one large vendor, instead of several smaller ones.
Monday, Hexaware Technologies said it won a $25-million contract to offer technology infrastructure solutions to a European client. In afternoon trading, the company’s shares were up 2.5% at 64.45 rupees.
The key winning strategy for the smaller IT companies is their focus in offering technology solutions for specific sectors which are seeing increased demand, says Dipen Shah, senior vice president at Kotak Securities.
At the same time, volume of outsourcing work has tempered down for India’s largest IT companies as big-ticket projects drew to a close.
Larger IT firms like Infosys and Wipro are also beset with structural problems and trying to retool their sagging business units. This is keeping investors away from their stock.
Investors are now betting on the cheaper and smaller-sized stocks which typically trade at four to five times their projected yearly earnings and could generate higher returns when compared with the larger peers, which are trading at 20-22 times, say experts.
This has led to bridging the gap in the valuations between the large and small IT companies, they say.
Amid the investor optimism, analysts believe there are still near-term challenges for smaller companies.
Increased wage costs, needed to retain talent, may eat into the profitability of smaller companies more than in those of larger firms in the shorter term. Further, clients may find it easier to work with one large vendor, instead of several smaller ones.
Source:http://blogs.wsj.com/indiarealtime/2011/05/30/small-is-beautiful-for-it-investors/
