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|  | OCTOBER 29, 2004
By Stephanie Crane India's Outsourcers Gain Traction [Page 2 of 2] SOLD PROSPECTS. Based on valuation, as well as our expectations of revenue and earnings gains and market-share growth in key markets, we recommend accumulating Infosys shares. We're impressed with its plans to boost revenues in high-value areas, and we believe efforts to leverage a consulting venture and focus on hiring in China could lead to a revenue mix with improved margins. Infosys is also raising wages and offering incentive compensation for mid-level jobs located in India to keep employees from leaving and inspire productivity. Our 12-month target price of $71 is based on a peer-based PEG ratio of 1.2. Wipro had revenue of $1.3 billion in 2004, greater than Infosys, but it has a slightly smaller market capitalization of $15 billion. Wipro focuses on global IT projects, with this business segment garnering 75% of sales. We also see a solid push toward business-process outsourcing, which posted a 20% rise in sales in the September quarter from the previous quarter. We expect Wipro's sales to rise 38% and 35% in fiscal year 2005 (March) and fiscal 2006, respectively, reaching $1.4 billion and $1.8 billion, thanks to aggressive expansion in the U.S. and Europe. While IT spending is growing in selected markets, with some early recovery in the U.S. and strength abroad, we expect Wipro to see solid bookings in upcoming quarters. We believe operating margins will continue in the range of 20% to 25%. We estimate net income of $305 million (44 cents per ADR) in fiscal 2005, up from $231 million (33 cents per ADR) in fiscal 2004, and $381 million (55 cents per ADR) in fiscal 2006. EUROPE, TOO. We recommend accumulating Wipro shares based on valuation, as well as our growth expectations for revenues and earnings, anticipated gains in market share, and advances in key markets in India, the U.S., Europe, and other regions of Asia. We have a 12-month target price of $26, which is based on relative multiple as well as historical valuation methods. We use a peer-based PEG ratio of 1.2 based on fiscal 2005 earnings. Satyam is the smallest of the three companies, with sales of $506 million in fiscal 2004 (ended March) and a market capitalization of $4 billion. It specializes in IT services, with strength in software development, system maintenance, engineering design services, and packaged software integration. We also see a push into business-process outsourcing, although at this point Satyam gleans less than 1% of sales from this business. In the past two years, 84% of revenue has come from contract renewals, which we believe is a result of management's desire to branch out into Internet-based applications and offer clients dedicated service. We expect sales to grow 31% and 20% in fiscal 2005 and fiscal 2006, respectively, reaching $750 million and $900 million, as we believe aggressive efforts by Satyam to gain share in the U.S. and Europe should begin to show positive results. We expect Satyam to post solid bookings in coming quarters, especially as it leverages its global delivery model. Revenue in the second quarter of fiscal 2005 rose 43%, driven by an increase in offshore contracts as well as stable pricing. We expect operating margins to continue ranging between 19% and 23%. Wages increased by 18% to 20%, somewhat dampening its margins, and something we consider a risk to long-term operating profit growth. Fiscal second-quarter earnings rose 28% from the prior year on a solid order flow. On this progress, we estimate net income of $149 million (95 cents per ADR) for fiscal 2005 and $164 million ($1.04 per ADR) for fiscal 2006. COMPETITION'S IMPACT. We recommend that investors accumulate Satyam, based on valuation as well as the growth potential of the fundamentals and that of the markets in which it operates. Our 12-month target price of $28 is based on relative multiple as well as historical valuation methods. We use a peer-based PEG ratio of 1.2 based on projected fiscal 2005 earnings per ADS. Risks to our recommendations and target prices for Infosys, Wipro, and Satyam include increased competition in IT services, resulting in pricing pressures that could erode profit margins; attrition in midlevel employees; and political pressures in the U.S., where these companies do over 50% of their business, that could adversely affect revenue and earnings growth. Note: Stephanie Crane has no stock ownership or financial interest in any of the companies in her coverage area. All of the views expressed accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed. Price charts and required disclosures for all STARS-ranked companies can be found at www.spsecurities.com
 Analyst Crane follows technology outsourcing companies for Standard & Poor's Equity Research Edited by Karyn McCormack Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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