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Tech stocks recover, but analysts say Q3 will be the litmus test

Tech stocks recover, but analysts say Q3 will be the litmus test
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First Published: Wed, Apr 23 2008. 11 58 PM IST

Difficult times: Tata Consultancy Services CEO and MD S. Ramadorai (right) with COO and executive vice-president N. Chandrasekaran.
Difficult times: Tata Consultancy Services CEO and MD S. Ramadorai (right) with COO and executive vice-president N. Chandrasekaran.
Updated: Wed, Apr 23 2008. 11 58 PM IST
Bangalore: A day after shares of Indian tech service vendors dropped sharply in value, led by Tata Consultancy Services Ltd, or TCS, which shed the most in a single day since its 2004 listing, information technology stocks bounced back in Wednesday’s trades but had market experts predicting a firm revival only when there will be more clarity on the fortunes of the companies in the second half of the current fiscal year.
Difficult times: Tata Consultancy Services CEO and MD S. Ramadorai (right) with COO and executive vice-president N. Chandrasekaran.
Tuesday’s sell-off on tech counters followed tepid fiscal 2008 results reported the previous day by TCS, India’s largest tech services firm by revenues. The company’s shares had plunged 11% by the end of the day. Shares of smaller peers followed—Infosys Technologies Ltd, India’s second-largest computer-services provider, dropped 2.9%, Wipro Ltd 5.1%, and Satyam Computer Services Ltd 5% — despite the companies reporting results in line with expectations of analysts who were wary of the impact of the US slowdown on the sector.
Tech service stocks bounced back with the Bombay Stock Exchange’s information technology index gaining 1.33% to close at 3,982.85 on Wednesday, when the exchange’s benchmark Sensex lost 0.51% to close at 16,698.04. Shares of Infosys gained 2.94% or Rs47 to Rs1,645.9, while TCS gained 0.32%, or Rs2.85, to Rs889.9, still 31.5% down from its 52-week high.
The forecast for fiscal 2009 by Infosys and Satyam were above analyst estimates: Infosys forecast up to a 21% revenue growth to Rs20,214 crore for the year ahead, while Satyam projected revenue to grow 26% to Rs10,670 crore.
TCS does not make sales and profit predictions but said it expected a good year. Most tech firms expect growth to surge in the second half, starting October, of the fiscal year.
But, “the uncertainty still continues and the revival is linked to the US economy,” said Anurag Purohit, analyst at Religare Securities Ltd. With no major earnings upgrade, Religare has a “sell” recommendation on TCS.
In the short term, growth concerns still remain as customers in the US hold back or reduce their spending on technology deployment and maintenance. Vendors expect their growth to remain flat in the first half of fiscal 2009, while gearing up for back-ended growth in the second half ahead assuming that their customers would start spending then. “Back-ended growth is slightly risky. In case customers don’t spend towards the second half, growth could be slower,” said Harit Shah of Angel Broking Ltd.
Calendar 2008 will still be a subdued year, because of the impact of the currency volatility on margins, the financial turmoil as well as the elections in the US. Still, tech results “indicate that things are not as bad as the market had initially expected,” said Avinash Vashistha, chief executive of Tholons Inc., an offshore advisory firm.
The forecast by Indian vendors suggest that they are witnessing demand for services in the US, Europe and Asia-Pacific as global companies such as General Motors Corp. and General Electric Co. increasingly outsource software application development and maintenance work to offshore locations such as India to control costs. Even global technology firms such as International Business Machines Corp. and Accenture Ltd delivered good numbers and forecast better growth in business, despite a slowdown in the US economy. Although customers will look to outsource more in light of the slowdown, it may take up to 12 months before one could see a take off in outsourcing. “We may see the Indian vendors reaping benefits in 2009,” Vashistha predicted.
Encouraged by such expectations, companies such as TCS are continuing their bullish investment and hiring plans for the current fiscal year. S. Mahalingam, its chief financial officer, said TCS would continue to invest in building capabilities and would be spending Rs2,000 crore on capital expenditure for the year ahead, almost a third more than last year’s Rs1,400 crore. It plans to add up to 35,000 people in the year and has made 22,400 campus offers. TCS currently has 111,407 workers on its rolls.
Infosys said it expects to hire 25,000 people of which 18,000 offers have already been made. Wipro has made some 17,500 offers, of which 3,500 it expects to be non-engineering graduates. Satyam wants to add up to 15,000 employees this year.
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First Published: Wed, Apr 23 2008. 11 58 PM IST