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Raja Simhan T.E.

CHENNAI, May 27

TIER-I information technology stocks including Infosys and Satyam Computers seem to have lost their charm among retail investors in the last one year.

On the contrary, there has been an increased liking for tier-II (mid-sized) IT companies such as Hughes Software and Infotech Enterprises in the period under review.

This is evident from an analysis of the shareholding pattern of the top-11 IT stocks (in terms of turnover, and those firms which announced their results before May 24) for the year ended March 31, 2003 when compared to the previous year.

As on March 31, 2003, the public holding in Infosys fell to 10.59 per cent against 12.51 per cent last year.

Similarly, the public holding in Satyam Computers reduced to 8.47 per cent (10.94 per cent), and in Digital GlobalSoft to 9.19 per cent (10.41 per cent).On the contrary, the public holding in tier-II companies including Mascot Systems increased to 5.37 per cent as on March 31, 2003 compared to 4.92 per cent the previous year.

Similarly, the public holding in Hughes Software increased to 12.78 per cent (7.96 per cent), and in the Chennai-based Eonour Technologies to 56.7 per cent (21.27 per cent).

Meanwhile, the promoters' holding in all the 11 firms came down marginally during the last year.

While the public have been selling tier-I stocks in the last one year, FIIs have been picking them up. For instance, as on March 31, 2003, the FII stake in Infosys increased to 39.18 per cent (36.59 per cent). Similarly, FIIs increased their stake in Satyam Computers to 56.27 per cent (52.11 per cent).

Says a Chennai-based analyst, in the last one year, retail investors have been selling a lot of tier-I information technology (at a premium) stocks, and picking up more of tier-II stocks.

The FIIs, having a large chunk of money, on the other hand, have shown more interest towards tier-I information technology, index-based (like Morgan Stanley, BSE and Nifty) stocks, he said.

According to a Mumbai-based analyst, the change in retail investors moving out of IT stocks was one of sentiment.

After the IT slowdown and dotcom bubble burst, a number of retail investors who burnt their fingers in the last couple of years have been exploring new sectors including pharmaceutical and FMCG.

Meanwhile, in its outlook on the domestic IT sector in April, the Franklin Infotech Fund (of Franklin Templeton Investments) said that the medium to long-term story for the IT sector continued to be bright.

As companies (abroad) look to cut costs, they will be looking to outsource their core IT requirements to high quality - low cost countries like India.

Indian companies, who were fringe players earlier, have entered the big league and started competing directly with global leaders in the sector. This has led to a squeeze in margins, but volume growth should continue to be healthy.

Considering this background, at current valuations the sector offered opportunities for long-term investment, the fund said.

Further, increased competition and dwindling IT budgets would lead to consolidation in the IT sector.

Major Indian companies like Tata Consultancy Services, Wipro and Infosys would start competing more directly with large US companies like Accenture.

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