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Neha Kapoor

MUMBAI, March 6

THE already battered software stocks continued to reel under selling pressures today with the markets expecting an across-the-board downgrade for the sector from several broking houses, domestic as well as foreign, on account of increased pressure on the companies' operating margins.

In fact, one large domestic brokerage, SSKI, has already revised downwards its earlier return expectations from IT stocks and analysts claimed that more such downgrades are expected in the days ahead.

The selling pressure at tech counters was reflected in the BSE TECk Index, which was down 14.16 points or 1.75 per cent to 794.46 in today's trading compared to the benchmark BSE Sensex that fell 35.75 points or 1.11 per cent.

On the BSE, tech heavyweights led the southward decline with Infosys falling 2.06 per cent to close at Rs 4098.10, Wipro was down 1.74 per cent at Rs 1399.65, Satyam down 2.18 per cent at Rs 213.10, HCL Technologies down 2.32 per cent at Rs 161.75 and Hughes Software down 1.86 per cent at Rs 174.

On the NSE, Infosys fell 1.94 per cent to close at Rs 4098, Wipro (Rs 1399.65) down 1.56 per cent, Satyam (Rs 212.80) down 2.23 per cent, HCL Tech (161.80) down 2.38 per cent and Hughes (Rs 172.60) down 2.29 per cent.

SSKI, in its report, has said: "We are revising downward our 12-month return forecast on IT services sector from the earlier 30 to 50 per cent to 5 to 20 per cent. It seems that operating margins will be far more severe in FY 2004 than our previous expectations, although strong revenue growth expectations are likely to be met. We expect Infosys to give an earnings growth of 20 to 23 per cent for FY 2004 as against current consensus expectations of 30 per cent. Also, the expected inflow of large application outsourcing contracts worth $100 million year apiece is likely to be pushed in to FY 2005/06. We believe market is currently underestimating risks and margin dilution pressure from such contracts."

According to an equity analyst with a local brokerage: "The market is expecting more such downgrades as everyone has become cautious about the sector's performance in the coming months. Also, the concern over SEBI banning participatory notes has been looming in the background for some time now, affecting performance of IT stocks. Any outcome would have an impact on FIIs' investments, who are among the large investors in technology stocks and part of their investment comes from participatory notes."

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