With most of the software stocks listed at the Nasdaq dipping sharply from their 52-week high levels, the valuations of Indian software companies are looking stretched. This could prove to be a stumbling block for the ADR offering of Infosys Technologies.
The stock has witnessed a sharp downtrend during the past few trading sessions. And, from a high of Rs 2,798 at the Bombay Stock Exchange (BSE), the stock has slipped to a low of Rs 2,385.
The fall of Infosys comes even as the sensex has gained close to 245 points during the same period. According to analysts tracking this sector, certain US-based software companies which have similar business profile as that of Infosys have witnessed sharp fall in their stock prices during the past three months. This has depressed the price earning (P/E) multiple of many of these stocks.
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The argument put forward by the software analysts is that the sharp fall in stock prices of the US-based companies has made the price earnings ratios of domestic software companies on the higher side.
"Over the past few months, the valuations of software stocks in the US have come off by 30-50 per cent. Consequently, we find that Indian sector benchmark Infosys now trades at a 56 per cent premium based on its 1998 earnings estimates to comparable US companies in the software service business," says a report prepared by ABN Amro Asia Equities.
Even though the merchant bankers to the issue have expressed confidence that the issue will sail through comfortably, some of the leading foreign funds have dumped this stock on expectations that the stock prices of these companies may plummet further in the days ahead.
Among the stocks that have similar business profile as that of Infosys include, Syntel, Sapient Corporation, Information Management Resources, which are listed on the Nasdaq.
The pricing of ADRs will be determined not only by the ruling domestic stock prices but also by the prices of comparable US stocks.
"Therefore, we expect people to increasingly look at US software stocks before investing in likely ADR issuers such as Infosys, NIIT and Wipro. Valuations of other stocks in the sector would then be worked out as premiums/discounts to the valuations of these key stocks," says the report.
For instance, Synte's P/E multiple has come down to 58.17 and it closed at $15.12 on September 10 at the Nasdaq, which is a sharp fall from its 52-week high. Another stock with similar product profile as that of Infosys Technologies is IMR. It closed at $20 at Nasdaq and its P/E as on September was 74.07.
"Indian software services companies now look more expensive than their US counterparts. Infosys trades at a premium of 56 per cent on 1998 and 16 per cent on 1999 earnings estimates to the US stocks we have chosen. We believe Infosys should trade at a discount to these stocks since most of them have a worldwide presence and much higher visibility in the US than Infosys," says the ABN report.