Indian IT majors lose premium valuation over global peers – The Hindu
SOURCE: The Hindu
DATE: March 30th, 2009
BL Research Bureau Stock market investors seem to expect that Indian IT majors will deliver lower growth than their global peers. PE multiples of Indian IT companies, which used to be much higher than their global rivals until last year, have fallen to the latter’s levels recently.
TCS, for example, enjoyed a PE of 21 in March 2008, much higher than the 15 times that Microsoft enjoyed at that time. Now, however, TCS trades at 11 times historical earnings, only a little higher than the multiple that Microsoft enjoys.
A comparison of the PE ratios of other global players such as Accenture and CSC with Indian majors such as Infosys and Wipro paints a similar picture.
Top Indian IT companies such as Infosys, TCS, and Wipro boasted PEs of 16-23 times in March 2008; they now trade at 8-11 times. Global giants such as IBM, HP, Microsoft and Accenture traded at 10-20 times their historic earnings, but now trade between 8-17 times.
These global majors have seen their stock prices decline between 12 and 37 per cent in a year, while Indian majors barring Infosys Technologies (flat) have seen stock prices fall by a steeper 30-50 per cent.
Major reasons
A variety of factors explain this disparity from a business perspective. One, global IT majors are much less dependent on the banking and financial services space (BFSI) than Indian companies. Accenture and CSC derive less than 25 per cent of their revenues from such clientele, while Indian IT majors derive 35-40 per cent of their revenues from BFSI clients.
Two, global IT majors such as Capgemini, CSC, and EDS (now acquired by HP) have Government organisations such as defence and public utilities, accounting for nearly half their revenues. Indian companies rely heavily on private tech spends.
Three, many global companies are product-focussed companies; a few others are exclusively enterprise software providers. This provides for multiple revenue streams in the form of licence fee, upgrade fees and maintenance and annuity-based fees.
Global players have reported impressive profit growth of 13-37 per cent in 2008, with the exception of Capgemini (2.5 per cent). Accenture derives nearly 60 per cent of its revenues from consulting services and continues to swell its order book with such assignments.
Stocks plummet
Some global majors have, however, seen a stock price decline due to company-specific issues.
HP, a hardware intensive player, has seen the steepest fall in price, possibly because of the $13.9-billion acquisition of EDS, which meant heavy cash outflows. Microsoft, the operating systems software developer, also fell over 37 per cent and suffered a PE contraction, after an aborted bid for Yahoo! and a host of monopoly lawsuits.
Most of these companies are increasing their offshore presence (especially India) significantly. This includes Capgemini, IBM, CSC and Accenture who are looking to cut costs in an increasingly challenging environment.
From an Indian perspective, the fact that players such as Oracle, SAP and Microsoft continue to do well means that their Indian IT partners such as Infosys, Wipro, TCS and HCL Tech could hope to see more business in the high-margin package implementation service space.
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