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Watch out for 'Mood Swings' - Views on News from Equitymaster
 
 
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  • Jan 5, 2001

    Watch out for 'Mood Swings'

    A look at what transpired in stock markets over the last fortnight shows just how mood swings can impact valuations of a well performing sector/company.

  • Click here for Live ADR Quotes

    Yes, we are talking about the technology sector, and in particular Infosys Technologies. Yes, we were always cautious of investing in such stocks when greed prevailed in the markets. Now, however, with fear having replaced greed, there may be an opportunity. Why Infosys? The company is the flag bearer of the Indian IT sector and has probably been one of the worst hit in the recent sell off.

    A report by a leading brokerage house downgrading all Indian IT companies to a 'HOLD' from a 'BUY' on the pretext that a slowing US economy will hurt the growth prospects of these companies was the primary reason for the sell off. Infosys, as a consequence, saw its stock price tumble from nearly Rs 7,500 to under Re 5,500, a fall of 26%. This was when fear was at its peak. However, with the Fed announcing a cut in interest rates in the US, Infosys has bounced back recording a gain of over 8%. The only reason one could attribute to this volatility is 'mood swings' (fifteen days is too short a period for a company's business prospects to change twice over!).

    Why do we attribute this volatility in Infosys to mood swings? But first, let's admit a slowing US economy will have 'some' impact on Indian technology companies. One key factor that investors must look when investing in the stock is the management of the company. And this is the factor that leads us to believe that the markets may have gone over board.

    Not that there are no instances to prove this. Infosys has had two makeovers in its recent past. First the company shifted its business focus from Y2K, in view of the approaching deadline. Next, the company steamrolled its way into the e-commerce domain, increasing its presence dramatically, in a period of just 2 years. Now with the US economy slowing, some confidence must be placed in the management to take concrete steps to minimize the impact of the slowdown. Indeed, the company derives over 30% of its business from other international markets, mainly Europe and Japan. The company is also said to be looking at China and in Nigeria it has been very successful in marketing in 'Financle' product.

    A rising tide lifts all boats (remember Jan - March 2000). But when the tide runs out it is factors such as quality of management and the fundamental strength of the company that come into play. If any technology company were to successfully over come the threat of a slowing US economy, there is more than an even chance that it would be Infosys Technologies.

     

     

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