Indian information technology service providers remain attractive to foreign investors as take-over targets, Merrill Lynch & Co.’s Indian unit said. These firms 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 . He was involved in advising Oracle Corp. on its $1 billion (Rs4,100 crore) takeover of Indian 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 IT-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 going cheap: Indian IT companies are currently trading at 0.5-1.2 times earnings to growth, against 1.5 times their US peers
Still, Indian IT companies are considered cheap, trading at 0.5-1.2 times earnings to growth, compared with as much as 1.5 times for their US peers, said Agrawal.
Indian providers increased their share of the 100 largest IT-services contracts awarded worldwide to 6% in 2006, from almost zero in 2002, according to Houston-based consulting company TPI. The share of the six largest US IT-services providers, led by IBM, dropped to 48% from 66%, TPI said.
Indian IT service providers 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 dollar.
Wipro Ltd, India’s third-largest computer-services provider, can manage a 1-2% 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 rose 44% to Rs861 crore, beating 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.
Shailendra Bhatnagar in New Delhi, Chitra Somayaji in Bangalore and Catherine Yang in Hong Kong contributed to this story.