Friday, September 14, 2007

Is it time to buy Indian outsourcing?

The current bearish mood on Wall St. has made certain Indian outsourcing firms values look attractive. Wall St. is suffering through a possible correction due to the housing/subprime mess and this is affecting the overall market.

The recent retraction in prices is especially acute for emerging market firms that have limited following on Wall St. Tagged as emerging market companies the Indian outsourcing group has been hard hit in recent weeks. Is this a valid reaction in terms of the price pullback or maybe a great buying opportunity.

Indian IT outsourcing firms like Cognizant, WIPRO, Infosys and TCS do have some exposure to the subprime turmoil in terms of backoffice support work for some mortgage companies. As the mortgage companies reduce staff and housing slump continues - there is going to be reduction in the outsourcing space. Recent news coming from Infosys confirms this fact. Revenue reduction of a few million (few %age points) is to be expected in the coming quarters.

On the positive side the valuation for these companies are looking attractive. Most are indicating a PEG of less than 1, which implies a buying opportunity (compared to PEG of 1.5 for ACN and IBM). Growth overall is still predicted in the 30-50% range which would support aggressive forward-looking PE. Overall the IT outsourcing market continues to bloom with the market maturing at a fast clip. Different industries (medical, technology, financial, manufacturing) are either extending their outsourced components or new players are entering the market (insurance, small business etc.).

Overall I think this may be an opportunity to invest in some of the blue chip outsourcing companies at cheap prices. There could be some more hemorrhaging if the market drops, since investors will exit emerging market stocks first before the rest of the market.

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