Chia-Peck Wong, Bloomberg
Hong Kong: Indian providers of information technology services remain attractive to foreign investors as takeover targets, Merrill Lynch & Co.’s unit in India said.
These Indian companies are considered undervalued when the demand growth for their products is likely to exceed 30%, said Saurabh Agrawal, managing director of investment banking and mergers and acquisition at DSP Merrill Lynch Ltd.
“It is universally acknowledged that for every global IT services player, it is strategically important to have a presence in India,” Agrawal, said in an interview in Mumbai this month. He was involved in advising Oracle Corp. on its $1 billion (Rs4,084 crore) takeover of Indian computer-software company I-Flex Solutions Ltd and Flextronics International Ltd in selling its Indian unit to Kolberg Kravis Roberts & Co. last year.
Shares of Tata Consultancy Services Ltd and Infosys Technologies Ltd, India’s biggest computer-services providers, have surged 26% and 25% respectively in the past year, amid an increase in orders from the likes of GlaxoSmithKline Plc as they seek to reduce software costs.
Still, Indian IT companies are considered cheap, trading at 0.5 times to 1.2 times earnings to growth, compared with as much as 1.5 times for their U.S. peers, said Agrawal. “Investors who believe that growth is going to continue for the next five to seven years do not find the valuations very daunting,” he said.
Indian providers increased their share of the 100 largest computer-services contracts awarded worldwide to 6 percent in 2006, from almost zero in 2002, according to Houston-based consulting company TPI. The share of the six largest U.S. computer-services providers, led by IBM, dropped to 48% from 66%, TPI said.
Merrill, the world’s biggest brokerage, was ranked the seventh takeover adviser in India last year, having been involved in 15 deals involving Indian companies totaling $5.2 billion.
Indian providers of information technology services are also likely to mitigate the impact of a stronger rupee on earnings by outsourcing some operations to other countries and hedging, Agrawal said.
“The outsourcing of IT services from India is set to grow,” he said, adding that a one percentage rise in the rupee against the dollar typically results in a fall of 30 to 35 basis points in operating margins. The dollar has fallen 10% against the rupee in the past year, reducing the earnings of Indian exporters who price their products in the U.S. currency.
Wipro Ltd, India’s third-largest computer-services provider, can manage a 1% to 2% rise in the value of the rupee as it has a strong hedging policy, Chief Financial Officer Suresh Senapaty said on 23 April. The Bangalore-based company posted its seventh straight quarter of record profit on 20 April. Fourth-quarter net income rose 44% to Rs8.61 billion ($211 million), beating analysts’ estimates.
More business process outsourcing companies may sell shares outside India next year, encouraged by the success of WNS Holdings Ltd, said Agrawal. WNS Holdings, a Mumbai-based provider of business data and voice services controlled by Warburg Pincus LLC, raised $224.1 million in its initial sale last July.
— With reporting by Shailendra Bhatnagar in New Delhi, Catherine Yang in Hong Kong and Chitra Somayaji in Bangalore