RealMoney Silver - Indian Tech Stocks Have Likely Bottomed

Indian Tech Stocks Have Likely Bottomed
By Jay Somaney
RealMoney.com Contributor
2/8/2008 10:25 AM EST

With the Nasdaq hitting a 17-month low intraday yesterday, does last night's positive earnings report and even better forward guidance from Cognizant Technology Solutions (CTSH) put a floor under the beleaguered Indian and quasi-Indian IT sector?

I believe that it does.

Of course, given the current economic environment, we do run the risk of entering a more meaningful and more prolonged recession, at which point, a good number of stocks will fall apart. Given the forecast for very attractive returns in the sector this year, however, it might be a risk worth taking.

If you go back and look at the quarterly numbers from the big boys in the sector, pretty much each and every one met guidance (at worst) or beat (at best). Also, almost every one of the SWITCH Six -- Cognizant, Satyam Computer Services (SAY) , Wipro (WIT) , Infosys Technologies (INFY) , Tata Consultancy (on the Bombay Stock Exchange) and HCL Tech (also on the Bombay Stock Exchange) -- raised guidance going forward, despite all the handwringing from investors, the media and (of course) the fearleaders here stateside.

If one averages out the four SWITCH Six names that trade on the U.S. exchanges (Cognizant, Satyam, Wipro and Infosys), revenue growth has been guided to a mean of 30.35% (on a forward 12-month basis) and earnings growth to a mean of 23% (again, on a forward 12- month basis). When one averages out the P/E multiple of those same four companies, however, a mean multiple of 16.8 times forward 12-month earnings is the result.

So what does that mean?

Well, it means that these stocks are trading as if investors think that the underlying companies are going to close their doors and go out of business soon.

Two words: not happening.

Here are a few reasons why it is not Armageddon in the Indian and quasi-Indian IT sector, despite the bleatings from the U.S.-based sell-side sheep, most of whom are too far removed from India to be able to see the big picture as far as these stocks are concerned.

Unless we enter a severe recession in the U.S., the Indian and quasi-Indian IT companies will see an increase, not a decrease, in demand as U.S. companies will scramble to lower costs to maintain as much profitability as possible in the current economic environment.

All of these companies have stated that they have been able to sign new contracts and renew existing ones at higher price points.

All are improving efficiencies and scale to increase utilization rates, which keeps operating expenses down.

All are focused on lowering attrition rates by increasing performance-based compensation, which could keep an employee more committed to his employer as he reaps the direct benefits from his hard work.

All have stated that they have not seen any softening of demand as of yet.

Finally, most of these companies expect the rampant wage inflation of the last few years to even out going forward; no doubt, pay hikes will still be above what the average is here stateside, but as long as it stays in a manageable 10% to 15% per annum range, these companies are well-equipped to control margins.

So, don't let the whiny sell-siders, sensationalistic journalists and handwringing naysayer's keep you away from what should be a very profitable sector in terms of investment returns this year. That is, of course, contingent upon the stumbling and bumbling fools at the Fed managing to keep the markets from falling apart.

Until the next time, happy investing.

At the time of publication, Somaney was long Cognizant Technology Solutions, Satyam Computer Services, Wipro, Infosys Technologies, Tata Consultancy and HCL Tech domestically and/or on the Bombay Stock Exchange, although positions may change at any time without notice.

Jay Somaney is a partner and fund manager with TSG Capital Partners, a hedge fund based in Plano, Texas, and founder of GlobalTechStocks.com, a subscription site that focuses on technology and Indian stocks (including ADRs), providing information, news and chatter. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Somaney appreciates your feedback; click here to send him an email.

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