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UBS Warburg ups price targets for IT heavyweights

NetScribes/Salil Panchal

Leading European stockbroker UBS Warburg has raised its price targets for HCL Technologies, Infosys, Wipro and Polaris even as it has dropped coverage of PSI Data Systems, Mastek and Tata Infotech due to their low market cap and poor liquidity.

In its global equity research outlook on the Indian IT sector, the investment bank has retained the targets for Hughes Software and NIIT. The investment recommendation for HCL, Infosys and Satyam is a 'buy' while that for Wipro, Polaris and BFL is a 'hold'.

Although UBS Warburg has raised the individual targets for some IT companies, it has retained the overall rating for the sector at 'neutral'.

According to a recent report put out by the investment bank, the Indian IT sector declined 42 per cent between November 2000 and May 2001 and companies have cut their estimates by more than half in spite of positive news in the form of new customer base and pipeline stability. Concerns remain in the form of a weakening European market and pricing pressures, the report says.

The report points out that big-ticket offshore contracts signed recently have been done at less than $20 per hour -- 30-35 per cent below current averages. "We think this could cause contractions in billing rates and spread to existing big customers next year,'' it says.

A review of tier-I and tier-II IT companies over the past six months shows that their performance was typically impacted by weak volume growth (online volumes remained negative while offshore volumes saw a 12.5 per cent growth) and onsite price contractions.

The positive, however, has been new customer acquisitions - which has been higher compared to the previous quarter. According to Warburg, most of the new customers have been bagged by Infosys, Satyam, Wipro, HCL Technologies and Hughes Software. "We are less negative than we were earlier," the report says.

In terms of market sentiment, the bank has said that global technology results and news flows continue to give mixed signals. "But the negative tilt appears to have reduced," it says.

Thus, the main trigger for a revival in the sector would come if existing players stopped scaling down and new players started scaling up. The strength of the European markets would also be an encouraging sign for investment bankers to raise estimates.

Although the European markets have witnessed a growth of 14 per cent this quarter, the Warburg European IT services team has warned that the UK, German and Nordic regions could show some weakening.

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