Growth pick available at super value

Has Indian IT come of age? This a question being debated upon by many a minds, even as the memory of the recent fall in January - and particularly the beating Indian IT stocks have over the past one year- continue to remain very fresh in our minds. Having done some reading on this topic in the recent past and using some of my own understanding of IT (I have worked in technology roles for a leading Indian IT Co. and a leading MNC Bank over the past 5 years), I am compelled to take a view that some of IT stocks appear to be very attractive at this point in time.


IT has a very wide canvas, but many of us are led to believe that Indian IT is akin to Infosys, TCS and the likes; however these companies only make up one end of the spectrum. These are without doubt fascinating stories, Infosys has largely earned super-normal profits on account of labour arbitrage between US and Indian markets, and done it very successfully. The sudden fall in dollar has awakened most of us- inefficiencies in markets do not remain for ever and the model which has done wonders so far can no longer do what it has done for Infosys in the past. In fact, as rupee is expected to strengther against dollar with the rapid strides Indian economy makes, certainly the labour arbitrage model will only continue to give lesser and lesser returns.

You will also find a number of small and mid-size IT firms who have tried to follow the Infosys business model, and some of them have been successful. Then you will find some companies like Mindtree Consulting, Geodesic Infomation, Sasken Communication Technologies who have decided to chart their own course and grow at a good rapid pace by adopting a business model centered around a single area or combination within IT products, Infrastructure services, IT Consulting (such as ERP systems implementation like SAP), hardware services, etc.

We need to ask ourselves, can Industry survive without IT? IT is now ingrained in the very roots of an organisation - if your system is down, your business is down. In Banks for e.g., if there is a major problem and the email system is down for the rest of day, you may better well leave the workplace and go home or go for a movie with your colleagues. If the core banking system is down, business suffers. If ATMs are down, business suffers. In capital markets trading for instance - if the system is down, it can result in huge losses for the brokerage firm.
A senior Reserve Banker I was interacting with sums up the role of IT in Banking as 'Banks are in-effect IT Companies which are trading on information'

If IT is here to stay, and which I believe with a lot of conviction and passion, the IT companies which I just mentioned appear to be stocks with very low risk and high return probabilities at this point in time.

A) Sasken Communication Technologies: Sasken makes software which is at the heart of communication devices like mobile phones and telecom equipment. It was started in 1989 by Rajeev Mody an Indian who worked in Silicon Valley in the US and returned to India to setup Sasken. Sasken's customers include companies like Nokia.
Growth has slowed this year due to one of its product series not doing as well expected in China as well as the overall dollar impact, management is of the opinion they will continue to do around 20-25% growth for the next couple of years. The management quality of Sasken, I would rate as amongst the highest quality among its Indian IT peers. In 2005 it acquired a Finnish company. The company aims to become a billion dollar company, and I believe it can do the same somewhere between 2011 to 2013 based on its management vision, capability and highest standards of corporate governance.

Factors that make it a compelling buy in value terms @ CMP of 118 :
Overall NSE IT Index - PE Ratio : 18.58 Price to Book Ratio : 6.42
Sasken- PE Ratio : 12.73 (TTM) Price to Book Ratio : 0.77 (zero point seven seven)

I believe we can expect reasonable returns from this stock, returns that will not disappoint.

Will be posting on Geodesic and Mindtree shortly.