Green Shoots Seen Extending Infosys, TCS Rally

Prospects for better economic growth in the U.S. and Europe are prompting analysts to raise their ratings for Indian software stocks, signaling a 31 percent rally in an industry index this year will continue.

The S&P BSE Information Technology index, comprising 10 companies including the top two Tata Consultancy Services Ltd. and Infosys Ltd., has outperformed 12 other gauges measuring industries from consumer durables to metals and banks, according to data compiled by Bloomberg. Nomura Holdings Inc. upgraded Infosys to a buy this week, while analysts at Sunidhi Consultancy Services Pvt. and K.R. Choksey Shares and Securities Pvt. said they may raise price targets for the stocks.

“Green shoots in the U.S. are carrying this industry right now,” said Naushil Shah, an analyst at Mumbai-based brokerage Sunidhi. “The timing couldn’t have been better as we were seeing volatility and instability as spending disappeared. At this rate, in a year, much of that could be forgotten.”

Data showing U.S. unemployment fell and optimism the euro region is recovering from a record-long recession drove TCS, Asia’s No. 1 computer-services exporter by market value, to its peak this month, Wipro to a 13-year best this week and Infosys to a two-year high. The surge compares with a 4.3 percent decline in the benchmark S&P BSE Sensex in 2013 as India’s decade-low growth caused the rupee to plunge 11 percent.

Customer Spending

The Infotech index has rebounded 44 percent from a near 10-month low it touched on July 26, 2012, when a prolonged credit crisis in Europe and an economic slowdown in the U.S., the biggest market for Indian code writers, curbed customer spending.

The value of outsourcing contracts in North America, which accounts for about 60 percent of the Indian software exporters’ revenue, shrank to $2.4 billion in the quarter ended July 2012, the lowest level in two years, according to data provided by researcher Ovum Ltd.

A report by the European Union’s statistics office in Luxembourg said Aug. 14 that gross domestic product in the 17-nation euro area rose 0.3 percent last quarter after shrinking 0.3 percent in the previous three months.

The growth brought to a close six straight quarters of contraction, the longest stretch since the euro’s debut in 1999. Europe contributes about 23 percent of the code writers’ revenue, according to industry group Nasscom.

The unemployment rate in the U.S. dropped to 7.4 percent in July, a report showed on Aug. 2, while a measure of job prospects in the world’s biggest economy climbed in July by the most in five months, a sign that the labor market is improving.

‘Optimistic Outlook’

“We are optimistic on the outlook of the IT sector because clearly U.S. spending is coming back and European spending should increase,” Sam Mahtani, director of emerging markets at F&C Asset Management Plc in London, said in a telephone interview on Aug. 14. “We have a stronger preference for TCS as they are well positioned. With Infosys and Wipro, you are betting on things getting better though it’s still very early.”

Tata Consultancy, which reported profit that beat analysts’ estimates in the quarter to June 30, said seven of the 10 large deals it won in the period were from companies in the U.S. The Mumbai-based firm sees a “healthy” pipeline of outsourcing orders from customers in major markets, Chief Executive Officer N. Chandrasekaran told reporters on July 18.

The company, which provides computer services and back office support to customers including Citigroup Inc. and Network Rail in the U.K., won two new $100 million clients in the quarter, the company said in a statement. A global aerospace major and a Nordic airline outsourced work to the Indian software-services provider, it said, without elaborating.

Good Pipeline

“Our pipeline is very, very good not only in the U.S. but everywhere else,” Chandrasekaran said at the news conference. “We are looking forward to a good year.” First-quarter profit rose 16 percent to 38 billion rupees ($621 million), surpassing the 37.5 billion-rupee median of 40 analysts’ estimates compiled by Bloomberg.

Shares of the software developer have surged 42 percent this year to 1,780.90 rupees. They closed at an all-time high of 1,870.10 rupees on Aug. 6.

Co-Founder’s Return

Infosys, whose 14 percent stock plunge last quarter was the worst since 2008, asked its billionaire co-founder N.R. Narayana Murthy to return as chairman in June and revive growth. Murthy told investors June 15 that a recovery may be painful and take at least 36 months.

Sales at the Bangalore-based company jumped 17 percent in the quarter to 112.7 billion rupees, exceeding the 109.9 billion-rupee median of 48 analyst estimates. It said it won seven contracts worth $50 million to $100 million in the period.

Infosys’s U.S. head Ashok Vemuri and TCS’s Chief Financial Officer Rajesh Gopinathan weren’t immediately available for comments on outlook for the industry.

Shares of Infosys have advanced 28 percent this year, almost mirroring the Infotech index. HCL Technologies Ltd., a New Delhi-based company, was the top performer in the gauge with a 49 percent gain, according to data compiled by Bloomberg. Wipro, the nation’s third-biggest developer by market value, has risen 30 percent.

Deal Pickup

“We are seeing a pickup in large deal closures, which has reflected in strong order book in the current quarter,” T.K. Kurien, Wipro’s chief executive officer, said in a statement on July 26. Billionaire Chairman Azim Premji said the company is seeing higher confidence among its customers amid “positive macroeconomic developments,” particularly in the U.S.

The Infotech index’s 31 percent surge this year compares with a 37 percent slide in a gauge representing 10 local mining and metal companies, 30 percent slump in an index of Indian power and electricity equipment producers in India, and a 9.4 percent advance in the consumer-goods measure of 11 members.

Nomura’s Mumbai-based analysts Ashwin Mehta and Pinku Pappan in a report this week wrote their top pick among the Indian IT companies was HCL Technologies, while raising their rating for TCS to neutral.

Demand indicators in the U.S. and discretionary spending across companies have improved, while the risk of U.S. visa restrictions on Indian software workers is receding as the proposed immigration bill is stalling in Congress, they wrote.

“This reduces downside risks to growth expectations and has the potential to provide upside kickers of about 3 percent to revenue growth for tier-1 IT companies in the best-case scenario versus our current estimates,” they wrote.

Rupee Slump

A depreciating rupee has also helped local software-service providers to chase deals at competitive prices, adding to the macro-economic optimism overseas, according to Nomura and Mumbai-based brokerage Nirmal Bang Equities Pvt. A weaker currency makes goods and services cheaper for overseas buyers.

The local currency touched an all-time low of 62.005 a dollar today as Asia’s third-biggest economy grapples with a record current-account deficit and struggles to revive growth from last year’s 5 percent, the slowest pace since 2003.

“The stumbling Indian economy has turned out to be a good thing for the export-oriented sector, increasing their competitiveness vis-a-vis Accenture and IBM who have got better at offshoring their services,” said Harit Shah, a Mumbai-based analyst at Nirmal Bang.

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