The Hindu : Stock markets: pinned down by IT sector

Online edition of India's National Newspaper
Saturday, Apr 12, 2003

Business

Business

Stock markets: pinned down by IT sector

By C. R. L. Narasimhan

The reaction to Infosys's results shows how fragile market behaviour can be. Corporate performance in the aggregate is expected to be even better during the current year.

On Thursday, in the wake of the announcement by Infosys of its financial results there has been turmoil of sorts in the markets. The benchmark Sensex witnessed a drop of 106 points; one of its steepest falls in a single day and the biggest in the past 14 months. On Friday, the descent continued dragging the Sensex to below 3000. Surprising as it may seem to the uninitiated, the share market was not reacting to any specific adverse aspect of Infosys's results, which was for the last quarter of last year and naturally added up to the whole year ended March 31, 2003. Its net profit at Rs. 957.93 crores increased by 18.6 per cent in 2002-03 and the revenue at Rs. 3,622 .69 crores grew by a little over 39 per cent. These are impressive numbers yet the market was reacting only because they fell short of the huge expectations that have come to be raised from a few tech companies such as Infosys. Last year's growth in revenue was considerably more than the company's projections. However the rise in profits has not been spectacular. Even more specifically the company's forecast for the current year (2004) — an earnings per share (EPS) growth target of 13-15 per cent — disappointing the markets which were expecting it to be somewhere around of 22 per cent. Add to this is the generally gloomy news about the IT industry, the fact that its biggest market, the U.S. is still suffering from a hangover of recession and more lately the war. There have been question marks over the less than ethical behaviour of a few tech companies in short-circuiting visa procedures of other countries. While practices such as those might have passed unnoticed in previous years when the developed economies were performing, they have become a serious matter and a black mark for the Indian IT sector, when those countries are showing a lacklustre economic performance. The opposition to outsourcing of business in the U.S. is also to be understood in a similar context.

The larger inference from the market's apparently extreme reaction to just one company's results is this: should the share prices be so dependent on a few stocks ignoring the tangible gains made in several other sectors? The tasks of those who are in the forecasting business become extremely hazardous if stock markets react the way they did on Thursday. As for the rest of the stocks, whether they are heavyweights or mid-cap or whatever, the consequences of such sudden swings are most unfortunate.

After all, all evidence points to a strong corporate performance in the fourth quarter, the results of which are just coming in. An exhaustive analysis of around 60 representative companies compiled by one of India's top brokerage houses, Motilal Oswal Securities, is illuminating. Highlights of the report* are as under:

The strong performance of the companies in the sample during the first three quarters is expected to continue in the fourth quarter of last year. Sales are expected to go up by 22 per cent in the forth quarter against 17 per cent for the full year. Both banking and oil sectors have shown an abnormal performance thanks to the ICICI merger and the exceptionally high growth in Oil and Natural Gas Corporation's profits. Excluding these two sectors, the net growth in profit of the sample companies is expected to increase by a modest 14 per cent on a sales growth of 13 per cent during the last quarter of 2003.

For the current year (2004), sales of the representative companies are expected to grow by 14 per cent, higher than the 13 per cent last year. Getting back to their recent past, a sector-wise break up would indicate that IT and oil/gas would have posted the strongest growth followed by metals during the last quarter of 2003. At the bottom would be the FMCG companies (sales growth of just 6 per cent). The pharmaceutical companies too will witness an unsatisfactory performance. For the financial year 2003, the net profit (excluding banks and oil companies) is expected to be 16.5 and forecast to grow to 22 per cent during 2004. Altogether the representative sample companies are expected to post a two-year CAGR of 22 per cent.

All these lead to the crucial aspect of valuations. Global uncertainty over Iraq had pushed down the price/earnings (P/E) ratios to "unsustainable heights.'' Considering that ROE and ROCE are expected to improve further this year, there is every reason to share the universal view that Indian stocks are undervalued. Clearly the present moment ought to be opportune for all types of investors to buy Indian stocks. More importantly, the gloomy outlook should dissipate in the face of the strong corporate performance and perk up the benchmark indices. Yet as the reaction to Infosys's results shows it is not quite easy to base your investment decision on such rational reasoning.

Printer friendly page
Send this article to Friends by E-Mail

Business