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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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MARCH 16, 2004
An Indian Adventure for Tech Investors The country's outsourcing giants such as Wipro, Infosys, and Cognizant are still alluring, despite the offshore bashing in Washington With American employers doing little hiring in the U.S. right now, outsourcing has become a dirty word. On the stump, Democratic Presidential candidate John Kerry is railing against "Benedict Arnold" companies that ship jobs to low-wage countries. Other vote-hungry pols are threatening legislation to curb the trend that threatens to move 3.3 million U.S. service-industry jobs offshore over the next 15 years, according to Forrester Research in Cambridge, Mass. The current bashing is taking a toll on some of the prime beneficiaries of offshore outsourcing -- or "offshoring." India gets the bulk of this work -- about 70% -- thanks to its plentiful supply of highly skilled tech grads who earn about one-tenth the pay of their U.S. counterparts. Since the beginning of the year, stocks of the Indian and Indo-American outfits that hire these workers have fallen big time -- as much as 40%. For the near term, investing pros say, hostility to outsourcing could continue to hurt the stocks of primary players such as Infosys Technologies (INFY ), Wipro (WIT ), Cognizant Technology (CTSH ), Satyam Computer Services (SAY ), and Syntel (SYNT ). IRRESISTIBLE ECONOMICS. Some analysts also see long-term danger for what they view as a group of stocks that's still too pricey. Cognizant has risen about 2,500% since its 1998 initial public offering, to around $43. Now, Massimo Santicchia, a Standard & Poor's analyst in New York, has a hold rating on the stock, which he expects to rise no higher than $50, up about 16%, over the next 12 months. "We believe the stock price already reflects what we regard as [Cognizant's] strong growth prospects," wrote Santicchia in a recent note to investors. (Santicchia has no ties to the company, but other units of S&P may). The other possibility, of course, is that the worries over Indian outsourcing stocks are overblown -- which could make now the time to get in at a decent price. Plenty of analysts don't expect the anti-outsourcing rhetoric to amount to much. "Our view is that this is just a lot of political talk. Restrictive legislation will be limited, and the outsourcing trend will continue to be robust," writes Lehman Bros. analyst Louis Miscioscia in a recent research note to investors. After all, U.S. outfits continue to find the economics of offshoring irresistible, since it can cut 30% to 50% off the cost of a project, writes Miscioscia, who's based in New York. That's enough to persuade Ashish Thadhani, an analyst with Brean Murray & Co. in New York, that Indian outsourcing stocks will push much higher in the future. He expects the biggest companies -- Infosys, Wipro, and Cognizant -- to boost profits by at least 25% over the next two years and has buy ratings on all three. They're still a good bet, Thadhani argues, "particularly if you have an investing horizon that looks beyond the current political debate." STRONGER PRICING. It's true that valuations are rich: Cognizant's price-earnings multiple on calendar year 2004 profits is 37, Infosys' is 33, and Wipro's is 36, according to earnings tracker Thomson First Call. That compares with an average of about 18 for the companies in the S&P 500-stock index. Still, argues Thadhani, the business outlook for these concerns has never been stronger, especially considering that the prices they charge are stabilizing after falling last year. "The best names in the sector have sold at these kinds of valuations in each of the last three years in a pricing environment that was nowhere near as good as it is today," Thadhani adds. Thanks to the improving U.S. economy, clients are no longer "hitting [outsourcing companies] over the head for discounts," he says. Of the top three, Cognizant is perhaps Wall Street's favorite. "It clearly has outperformed the rest," says Brian Kinstlinger, an analyst with Sidoti & Co. in New York, who rates it a buy. Cognizant, which got its start in 1994 as an in-house technology development center for business-information outfit Dun & Bradstreet (DNB ), is expected to report 49% higher net income of $85.7 million, or $1.20 a share, in fiscal 2004 on revenue of $535 million, a 45% improvement, according to Thomson First Call. Kinstlinger has assigned the stock a $64 target price, which suggests it could appreciate 49% in the next 12 months. (He has no ties to the company, nor does his firm.) RARE GROWTH RATE. Even though 70% of its staff is in India, Cognizant is headquartered in Teaneck, N.J., a factor that may help attract U.S. clients, analysts say. It specializes in providing tech services to financial-services and health-care outfits -- two sectors that have been perhaps the most willing to embrace outsourcing. Thadhani also likes Infosys, which is based in Bangalore but whose global sales office is in Fremont, Calif., as well as Bangalore-based Wipro. Infosys, whose customers have included the likes of Bank of America (BAC ) and Cisco Systems (CSCO ), is the largest and most profitable of the Indian outsourcing concerns. For fiscal 2004, analysts expect it to post a 38% increase in net profit, to $268.6 million, or $2.04 a share, on 40% gains in revenue, to $1.05 billion, according to Thomson First Call. "It's pretty rare for a $1 billion company to grow like that," Thadhani says. About 38% of Infosys' clients are in the financial-services business, with an additional 15% in telecom, he adds. Thadhani's target price of $128 for Infosys indicates that he thinks the stock could gain 67% from its Mar. 11 closing price of $76.44.
BW MALL
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