The Hindu Business Line : IT stock de-rating is a global trend

An analysis of the stock prices of global IT majors since July 2007 – the start of bad news flow on the US sub-prime issues- reveals that these companies have suffered a de-rating (reduction) in their PE multiples. While service companies have suffered a decline in stock prices as well as PE multiple, product software companies have only seen their multiples trimmed.

IT services companies: IBM, Accenture, EDS and Capgemini have seen their stock prices dip by 9 to 36 per cent, accompanied by a notable fall in their PE multiples. These companies have similar service lines as the Indian IT majors, though they operate on a much larger scale. Except Capgemini, which has a major European presence, the other three companies rely mainly on US clientele, with a relatively smaller proportion in Europe.

Despite lukewarm investor sentiment towards the sector thanks mainly to the sub-prime scare, these companies have managed profit growth of between 10-50 per cent for the year ended December 2007, compared to the previous year. A weakening dollar vis-À-vis Euro/Pound has been positive for IBM, EDS and Accenture as it tends to improve realizations. An important factor to note is that while the global majors operate at net profit margins of 3-11 per cent, the Tier 1 Indian players still maintain average net profit margins of 20 per cent and above.

Product software majors: Microsoft and Oracle’s have seen their PE multiples dip, though not as much as services majors. Their earnings growth has been reasonable. These companies have a more diversified end-user profile compared to services companies and operate at net profit margins of around 24-26 per cent.

Profit growth for Microsoft (11.9 per cent) and Oracle (26 per cent) on a large base indicates that during this period, there have been no major shake-ups as far as client spending is concerned. This is a positive for Tier 1 Indian majors, especially Infosys and Satyam, who act as package implementation partners for these companies and derive substantial revenues from them.

Overall, the de-rating in global IT stocks is more driven by perception rather than by their recent profit performance. But the global majors appear to have suffered a lower degree of de-rating when compared to their Indian counterparts.

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