New Delhi, Aug 20: BZW India is bullish on the software sector and has recommended investors to overweight this sector in their portfolio. According to the BZW report, the biggest opportunities for the Indian software service providers include the Y2K solution, the common European currency and Internet-related applications.

The global market for Y2K services is an estimated at $ 300 to $ 500 billion. The common currency for the European Union opens a new market for banking and financial market software development. ``The Euro will be adopted on January 1, 1999, which means integration of the financial markets. The existing softwares have to be modified to adjust to this change.'' The report also says that the continued growth of Internet and associated activities represent exciting business opportunities for the service providers.

According to report, all infotech stocks have risen sharply in the last-quarter. ``Liquidity constraints apart, part of the buying has been attributed to the anticipated purchases by UTI Infotech Fund which has already raised about $ 50 million worth of stocks,'' says the report.

BZW expects India's competitive advantage of cheap manpower, perceived quality software service providers and moving up the value-chain to result in strong earnings growth for this sector.

With the demand for software personnel outstripping supply, the report projects a 40 per cent growth in the training segment. ``Shortage of skilled labour implies that all Indian companies are looking to tap the set of software personnel for meeting demand. The supply of software engineers is not keeping pace with demand. This provides great business opportunity for computer education providers, especially NIIT and Aptech.''

With competition between service providers and development of better software development practices, price cutting has come to stay in the software industry. One of the important players in the software sector, Infosys has taken a lead by deciding to stay away from a man power multiplication game to intellectual property-based products.

Currently, estimated at Rs 6,400 crore, the software industry has registered a 52 per cent growth in fiscal 1997 over fiscal 1996. Growth in exports outstripped growth in domestic sales for fiscal 1997. While exports have rose by 54 per cent to Rs 3,900 crore, domestic sales improved by 50 per cent to Rs 2,500 crore.

With successive reductions in the duty structure for the IT industry, products have become much cheaper. Besides, competition has led to a virtual price war, driving down prices and improving service standards. ``The presence of multinationals, especially in financial and manufacturing segments, has led to the emergence of software as a productivity tool. There has been rapid growth in domestic demand for products as a result of cut in duties and increased availability.'' United States continues to be India's biggest customer and Europe and Japan will be other important markets for service providers in the short-term, says the BZW report.

Aptech Limited

Aptech and NIIT are the two leading computer education companies in India with a combined market share of 80 per cent. The market for computer training is estimated to grow at about 40 per cent per annum for the next two years and this will will drive Aptech's top line growth.

Aptech announced a 32 per cent growth in profits for the first-half of 1997. Profits in 1997 and 1998 is projected to zoom to Rs 21 crore and Rs 29.3 crore. The move towards US GAAP accounting standards in the next three years will improve the overall management rating.

Infosys Technologies

A premium valuation in this software stock is justified given the quality of management, accounting policies, infrastructure, product portfolio and shareholder-friendly management. The top-line growth is assured because of strong demand for services (Y2K solution and the European common currency programme). This remains our top pick in the software sector. The steep rise in the stock price in the recent past was also aided by the change in FII holding limits from 24 per cent to 30 per cent.

Infosys' basic business offerings include fixed price service contracts, software maintenance, offshore development and sale of products. Different products in its stable include In2000, PorteNET, Websetu, WMSYantra, DMAP and Bancs2000. The company is now shifting its focus away from services because of increasing competition.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.