Speaking on the valuation of IT stocks at the national seminar on IT at the stock market at the Indian Institute of Management, Bangalore (IIMB), Mr Bhat said IT companies had created tremendous value in the Indian market and was one of the key aggressive growth industries. ``When one talks of valuations, the volatility factor is important. The state of the economy, interest rate and inflation, technological change, especially the Internet (which has changed the way the industry operates) and market momentum are the influential macro-factors,'' he said.

The micro-factors influencing valuations include earnings and cash flow, discounting future earnings visibility, trends in return on capital, shareholder value-creating measures, and the like.

``There is no single sure formula for valuations. The market finally is a more rational player, more important than the volatility aspect. The stock market rewards companies which see high returns on equity,'' he said. Indian IT companies currently see margins of about 37 per cent on their services while the US counterparts have margins of 15-17 per cent, thus making the former more profitable. In spite of profitability, the China factor currently looms large over the Indian software services industry. According to Mr Bhat, the Indian industry is ahead of China by four years and India could maintain its leadership position provided it traverses the value chain. ``Product companies in India currently lack the access to required amounts of capital. Outsourced R&D business is in fact the first stage of moving up the value chain which the Indian companies have managed to step into,'' Mr Bhat said.

While bigger Indian IT companies have been seeing a sustained 95 per cent CAGR for the past three years, they have also diversified their product/service portfolio to cover more market segments, thus making them better-equipped to handle the effects of the US slowdown, he added.

US slowdown may impact some vital segments
The slowdown of the US economy is likely to impact the hardware and the e-strategy segments, according to Jardine Fleming director UR Bhat. Considering that Asia is moving up the value chain, the US slowdown, according to industry analysts, will lead to more spending on outsourcing from low-cost destinations - an advantage that India still enjoys.