Indian IT Companies with Local Focus Gain Edge

Of the IT IPOs on Indian exchanges in the past 15 months, investors favor companies with niche offerings and a domestic market focus

The wheel appears to have come full circle for information technology stocks. There was a time when outsourcing was the buzzword and the best companies to bet on were those catering to clients in the US. That is no longer the case.

An ET Intelligence Group analysis of the IT companies that got listed in the past 15 months reveals that those companies with niche offerings and focus on the domestic market are market favourites.

On the other hand, those with plain vanilla offerings have suffered the most in the bearish market due to the apathy to the sector in general.

This shift in preference can be attributed to several factors that are likely to adversely impact the outsourcing model of the Indian IT exporters. These include the recessionary trend in the US economy, uncertainty over the IT budgets of the US clients, global credit crisis and the weakening of the dollar.

Out of the 13 software, hardware and BPO companies that got listed since January 1, 2007, as many as seven are trading above their issue price despite the recent carnage in the stock market. All of these seven companies are niche players mostly catering to the domestic market.

The list includes companies like Allied Digital, Omnitech, and Redington India which provide hardware and networking solutions. A major portion of their revenues comes from Indian market.

"Investors are looking positively at the IT companies with presence in India. This makes sense at a time when the stronger rupee and US slowdown are causing problems for the IT exporters," said Angel Broking IT analyst Harit Shah.

On top of the list is Allied Digital, a Rs 261-crore (trailing 12 month revenue) Mumbai-based IT infrastructure company.

The stock has shot up over four times its offer price of Rs 190 since its listing in July last year. Next in line is the Rs 10,400-crore hardware distributor Redington India. Its stock has more than trebled from the offer price of Rs 113 since its early 2007 listing.

While these companies are hogging the limelight, plain IT service providers and BPO companies are being shunned by investors. The stocks of MindTree Consulting and Zylog System have substantially fallen below their respective offer prices.

These companies offer IT outsourcing services to customers in the US and other parts of the world. Given the slowdown in the US economy, analysts are worried over the growth prospects of such IT exporters. Further, weakening dollar has put pressure on the profitability of these companies.

Apart from IT services exporters, BPO and KPO outfits are also being hammered by the investors. These include Rs 1,230 crore Firstsource Solutions and Rs 86 crore eClerx Services, both listed in 2007.

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