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The Rediff Business Special/

Boom Time

Abhijit Joshi in Bombay

Part I

In the emerging corporate scenario, the old favourites are losing out on the capital appreciation and the market capitalisation fronts to their software counterparts. Wipro's market capitalisation has climbed vertically by almost 1,200 per cent from Rs 6.88 billion on February 28, 1997 to Rs 88.05 billion on August 7, 1998.

In the same period, Infosys Technologies posted a 500 per cent appreciation to Rs 43.65 billion from Rs 7.62 billion. Even relatively new players like Satyam Computers and Pentafour Software have seen their market capitalisation grow by 900 per cent and 800 per cent respectively. NIIT's market capitalisation has shot up from Rs 8.97 billion to Rs 37.65 billion, Tata Infotech's from Rs 2.53 billion to Rs 18.06 billion.

According to one study, in the last four years, the Tatas registered a 41 per cent fall in market capitalisation at Rs 198.09 billion. The capital appreciation of group elders such as Tisco, Telco, Tata Power, Tata Chemicals, Tata Tea and Indian Hotels has shown a fall of 40 to 60 per cent. And this fall would have been 46 per cent had Tata Infotech been left out of the group.

And the stock's growing market capitalisation has been amply rewarded by both the Bombay Stock Exchange and the National Stock Exchange. After allowing carry forward transactions in software stocks, the BSE is working towards including the top software stocks into its 30-stock sensitive index or the Sensex.

Says BSE President J C Parekh: ''The amount of interest generated in these stocks is too great and thus we cannot sideline them anymore.'' Adds BSE executive director R C Mathur: ''More so after the government has given various sops to this sector.''

What is needed for these stocks to be included in the Sensex is a minimum market capitalisation of Rs 12 billion and liquidity which a number of top infotech companies possess. The NSE's index maintenance sub-committee has already included Infosys Technologies and NIIT in its S&P CNX Nifty and Tata Infotech, Satyam Computers and Pentafour Software in its CNX Nifty Junior index. These changes are effective October 7.

No wonder then, speculator interest in these stocks is currrently at an all-time high.''Since these are the only stocks that have moved up substantially, speculators can book profits by selling them even in a falling market. So obviously, volumes are high in this sector,'' says BSE director Rajendra Bhantia.

The boom could perhaps be attributed to the interest of foreign financial institutions and venture capitalists in this sector. Foreign institutional holdings in software companies crossed their holding limit even at a time when the industry was just about raising its head.

Infrastructure Leasing & Financial Services launched its $ 350 million India Fund in 1994 and picked up Satyam, NIIT, Pentafour and Infosys at low prices. Even now, 25 per cent of its portfolio belongs to the software sector.

Other early risers were FII mutual funds. Alliance Capital has invested almost 25 per cent of its Alliance '95 Funds and 33 per cent of its Alliance Capital Tax Relief '96 fund in software stocks.

One reason why Indian mutual funds did not accept the infotech sector as an investment option is because these funds could not understand the business. Companies in the infotech sector hardly had any assets to back on, and were set up by individuals with new management styles.

For many Indian fund managers with an aversion for technology, the new sector seemed to be full of risk. In comparison, making investments in tested commodity stocks seemed safe. But all that has changed now. ''With public money at stake, it is only after the sector has been tried and tested that the mutual funds have now begun meeting with the managements to learn about their future plans and shifting their portfolios,'' says Alliance Capital's India Manager Ajay Kaul.

Foreign investment in this sector began earlier than the natives because there was a growing demand for technology shares abroad. ''Most fund managers were and are translating the market valuations of software stocks abroad to their Indian counterparts. This naturally leads to a big disparity and one to believe that there is much scope for growth,'' says Dilvikas Finance's software research manager Bhavesh Shah.

In fact, many believe that the Tatas may float TCS on NASDAQ in order to do justice to the company and cash in on the great demand for technology shares in the US markets. Indian companies too seem to have realised this and are working their way to meeting worldwide norms. Companies like Satyam and Infosys have adopted US accounting principles and others like Pentafour are in the process of doing so.

But there is some concern if Indian companies can stand up to the international challenge. There are some who believe there can be no comparision between software stocks in the Indian and US markets since there is little similarity in the kind of projects that Indian and foreign software companies do.

Says Lloyds Securities sales manager Hiren Gada: ''There is hardly any software company engaged in the kind of research and development work that software companies in the US, the UK or Europe are into. So a comparision between the two is out of the question.''

Although India is acknowledged for its skills, they are largely for services and not products. Most Indian software companies are involved in lower-end jobs like body shopping for the year 2000 problem. Even in this sector, China offers stiff competition.

If real money has to be made, then it will have to be made in terms of products. Currently, only a handful of Indian companies are doing this. Infosys has BANCS 2000, Pentafour is working in the multimedia area, Satyam is bullish on the Internet business, Ramco and TCS are working on ERP products like Marshall and Ex and RTWo.

The Great Infotech Boom, continued

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