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The Rediff Business Special

The Great Infotech Boom

Abhijit Joshi in Bombay

In the recent past, while the Bombay Stock Exchange index and its shares have been plagued by bearish sentiments, infotech stocks have shown a reversal in trend. Between November 28, 1997 and August 21, 1998, the index slipped by 638 points or 17 per cent. But infotech stocks showed above 100 per cent and in some cases even over 500 per cent growth.

No doubt, the demand for information technology shares is soaring. But is the lure of these stocks enough to pull back the small investor into the market? If not, then who is lapping up these stocks currently?

''There is no denying that even retail investors are realising the gains that can be made from software stocks: after all, Pentafour Software, which was available at just about Rs 144 six months ago today costs Rs 623. With such appreciation which investor would not want to include software stocks in his portfolio?'' asks S Chellappa, assistant vice-president, Kothari Pioneer.

His company recently launched India's first infotech dedicated fund, the Kothari Pioneer Infotech fund. The response to this open-ended scheme proves his point. Though final collection figures were not available, the fund was expected to have collected above Rs 50 million from the public.

Chellappa believes that in the future many more such funds are likely to emerge because ''going by the 50 per cent growth this sector is likely to achieve in the next three years, which retail investor would not want to pick up a diverse portfolio of the best software stocks if he can afford it?''

Others too believe that the mutual fund route is the only way a small investor can be part of the current software boom because software stocks at their current prices are way above reach.

Suhas Naik, manager, Infrastructure Leasing & Financial Services, reasons: ''After all, who can afford to buy 100 shares of Infosys Technologies when each share costs Rs 2,490 even when the index is at its 19-month-low?''

Software stocks like NIIT, Pentafour Software, Wipro and Tata Infotech and Satyam are quoting much higher prices than they did nine months ago. Even smaller companies like BFL Software, Cyber Tech, Visual Soft and Rolta have shown a significant rise in their share prices.

Company	premium 9 months back (November 28, 1997)	on August 21	% rise
Satyam Computers	126	492	290
NIIT	638	1,651	158
Pentafour Computers	144	623	332
Tata Infotech	758	1,560	105
Wipro	510	1,832	259
Cyber Tech	106	254	139
BFL Software	72	477	562
Rolta	15	62	313

The most immediate reason why there has been a sudden interest in infotech stocks is the rise in their fortunes. The information technology industry has been the only one to buck the recessionary trend in the economy. And with the kind of sops the government has granted the infotech business, it is expected to do even better in the future. With quarterly results now becoming obligatory, software companies had their first chance to prove their might as compared to the heavyweights in the market.

The sector has announced excellent results for the quarter ended June 30, 1998. Amongst the large and liquid companies, Satyam Computers recorded the highest revenue growth. Wipro recorded the biggest jump in net profits. Even medium-sized companies like BFL Software and DSQ doubled revenues, while PSI Data's revenue grew by 17 per cent. Amongst small-sized companies too, growth has been impressive. R S Software and Visual Soft more than doubled revenues.

FIRST QUARTER RESULTS 1998-99

In comparison, market favourite sectors like steel, cement, tyre, automobile and engineering suffered because of the downtrend in the economy. Thus, Tisco's revenue was down 58.70 per cent, Telco's figure was down a staggering 139.37 per cent and Grasim Industries was down 23.60 per cent.

In fact, many of these to date blue chip company promoters are now realising that their software subsidiaries can earn better brand values. Eleven-year-old Mahindra British Telecom, the software fledging of the Rs 41.28 billion auto major Mahindra & Mahindra, is today valued at par with its 52-year-old parent. MBT is a Rs 1.01 billion joint venture between M&M and British Telecom. As on August 13, M&M's market capitalisation was placed at Rs 15.55 billion at a price of Rs 150.40, while the unlisted MBT was placed between Rs 15 billion and Rs 17 billion.

Air conditioning major Blue Star plans to hive off its software division into a separate company called Blue Star Infotech Ltd. Blue Star will then charge a royalty of four per cent from the new company for using its brand name.

The software division, started in 1984, handles field project management and network users accounting. With clients like Hewlett Packard, Hitachi Medical Corporation, 3M, Imation Italy and Racal UK, it declared a profit before interest and tax at Rs 45 million for the year ended March 1998.

According to corporate watchers, companies realise that in difficult times like these, their software divisions are being under valued simply because the other not-so-good performers are being taken into account too.

Thus, they would rather hive these divisions as separate software companies having high P/E ratios. This would also help them raise more public money if they wanted to. Tata Consultancy Services, belonging to the Tatas, is a matter of pride for the group.

The group is now said to be planning to make a public offering of TCS in order to provide itself with huge financial resources and to improve the liquidity base for all its other companies. ''The trend clearly shows that in the near future most corporates would have shifted their priorities to the more profit-making software companies,'' says Rajendra Veerkar of Lloyds Securities.

The Great Infotech Boom, continues

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