Terrorists Hit Software Prospects

Before the tragic events of September 11, the frontline Indian infotech (IT) services companies were cruising along comfortably, after the not too encouraging results for the quarter ended June 2001. The stock valuations seemed to be stabilising and consensus was gradually building up that after a long while stocks finally appeared to be offering a positive risk-reward.

However, the September 11 incidents have upset the applecart and now the domestic software companies are in the midst of a significantly increased uncertainty. Software analysts have attempted to assess the impact of this changed business environment on earnings and tried to determine the impact of the changed outlook to the pricing of shares.

In terms of earnings, analysts have factored in two sets of changes in their forecasts. The disruption of activity in the US for the next couple of months is expected to lead to a quarter-on-quarter decline in revenues and profits in the third quarter of 2001-02 as decision making slows down, they say. Over a slightly longer period, they expect the US economy to slow down considerably (over the next few quarters) and this cannot possibly be factored into local prices at this time. This uncertainty hangs heavy on the markets.

The earnings of software majors during the quarter ended June 2001 increased by only 11.69 per cent in the aggregate, and this was much lower than the 55.77 per cent growth rate in the quarter ended March 2001 and a blistering 77.08 per cent in the quarter ended December 2000. During the quarter ended September 2000, software companies reported a growth rate of 69.05 per cent.

Software giant Wipro, which was hammered down below Rs 800 per share on the bourses, was otherwise looking strong in earnings. Wipro has had growth rates of over 100 per cent in three consecutive quarters -- July-September 2000, October-December 2000 and January-March 2001.

However, in the quarter ended June 2001, its growth in earnings slipped to 90 per cent.

Analysts project a 6 per cent decline in earnings in the third quarter (Q3) of 2001-02 for Wipro, in the worst case scenario following the September 11 events. Prior to the attacks, the consensus estimate was a 17 per cent growth in Q3. The lower expectation in growth rates is reflected in the company's showing on the bourses where its share price has declined from Rs 1,600 a few months back to around Rs 1,000-1,050 now.

Earnings of Infosys Technologies was already on the wane after registering a 134.4 per cent rise during the quarter ended September 2000. The growth rate in earnings slipped to 125.27 per cent in October-December 2000 and it worsened further to 111.72 per cent in January-March 2001. The growth rate was down substantially to 56.68 per cent during the quarter ended June 2001. In the changed scenario, analysts project a flat earnings growth during the third quarter of 2001-02.

Satyam Computer which has registered a growth rate of over 100 per cent during the last three consecutive quarters is unlikely to repeat the show during the forthcoming quarters. The company's 77 per cent revenue comes from the US. Satyam's exposure to the financial services domain has been at 38 per cent. The stock has come in for significant correction in the recent period, reflecting the uncertainty in demand for its speciality products. Indeed, analysts have projected a 4 per cent decline in its earnings growth (quarter-on-quarter) for the third quarter.

The fourth major software company, HCL Technologies has registered the lowest earnings growth rate of 45.56 per cent during the quarter ended June 2001. This has been a sharp drop compared with earnings growth rate of 170.67 per cent in October-December 2000 and 113.44 per cent in January-March 2001. The company has warned that the second quarter results in the current fiscal would be below expectations, blaming postponements in data warehousing investment by its overseas customers. Analysts project a 10 per cent earnings decline during the third quarter of the current year.