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Issue Date: October 2006

Indian IT services stocks continue to outstrip Western giants

1 October 2006
Patrick O'Brien

Shares in the major India-based IT services providers have vastly outperformed their western rivals so far this year, despite falling sharply in May and starting from valuations based on much higher multiples of earnings and revenues.
The share prices of the largest four India-based vendors: Tata Consultancy Services, Infosys, Wipro, and Satyam, all increased by double-digit percentages, a feat that none of the largest five US service providers managed, and only one of the largest five European players, Capgemini, achieved.
Overall shares in IT services companies have offered a poor return on investment in the first three quarters of the year, with overall increase in prices of less than 3%, far less than most of the capital markets' indices.
ComputerWire tracks the share prices of 43 of the largest IT services companies with the GCS Index, which is updated weekly in Global Computing Services MarketWatch. With its starting point of 100 at the beginning of the year, it rose sharply in the opening months to reach a high of 105,8 in early May before macroeconomic factors, regarding interest rate fears, caused it to dive to 91,7 in mid-July.
While the GCS Index shows that IT services investments have been easily outperformed by the Dow Jones Industrial Average, the S&P; 500 and the NYSE Composite Index, the reverse is true over the last three months, as the GCS Index has bounced back strongly from 96,2 at the beginning of the quarter to 102,8 at the end of September.
Of three regional indices which track the top five IT services companies in India, US, and Europe, the Indian Top Five has risen to 117 over the last nine months, while the US Top Five has struggled to 98,3, with the Europe Top Five index barely breaking even at 100,4.
The Indians have not had it their own way all year though, as the India Top Five index was the worst performing of the regional indices by early June, by when it had slumped to 92,2, which reveals the volatile and risky nature of the stocks, despite their handsome overall returns.
While Indian stocks made massive gains in the third quarter following impressive financial results, many of their European rivals have struggled with low growth and in some cases poor management. Atos Origin, LogicaCMG, and TietoEnator have all suffered big hits to their market caps this year. US IT services providers' efforts to ramp up their global sourcing strategies has only served to mitigate the damage being done by the likes of Wipro and Infosys, which are competing for larger contracts and winning deals in markets previously the preserve of IBM and Accenture, such as finance and accounting outsourcing.
The best performing stock on the GCS Index was Cognizant, a company which offers a total offshore delivery model, but is based in the US. Its shares have risen by almost 50% so far this year, after consistently delivering revenue growth even stronger than its India-based peers.
Source: Computergram

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