Economy: Traces of turn around - Views on News from Equitymaster

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Economy: Traces of turn around

Apr 5, 2002

Wipro's deal with IBM caused the Nifty to surge. Wipro alone added 13 points to the 22 point rise in the Nifty. While the size of the deal is not clear yet, what could have caught market interest is the fact that the partnership may involve software solutions. Global IT services companies are increasingly finding it difficult to compete with the Indian players, due to the pricing power of the latter. Companies like IBM, CSC and Keane are faced with two options: either to set up offshore operations in countries where cost of manpower is low or to tie up with Indian companies. In the recent past Satyam and CSC entered into an agreement for third party outsourcing. Meanwhile, companies like Keane have bought out existing Indian players to start operations in the country.

This goes to prove one point without doubt. The offshore advantage has been firmly established in west. Thus, it's a question of time before business starts to flow in. However, while most of the software companies will witness volume growth, it will up an uphill task to negotiate billing rate hike. Thus, the operating margins will be a key figure to watch for the software companies. Software companies are likely to dominate activity on the bourses in the near future.

On the other hand prospects for metals are also improving. The expected improvement in the global and domestic economy could be driver for recovery in commodity prices. Domestic aluminium production has slipped by 3.2% during the first ten months of FY02 as compared to 5.8% growth registered in the same period of the previous year. However, after sliding for two consecutive months in November & December '01, production has risen by 3% for January '02. With a likely turnaround in the domestic economy, aluminium production is likely to report positive growth in the last two months of FY02.

Steel production, which stalled in the first five months of FY02, started rising, beginning September 2001. Finished steel production increased by 3.5% in December 2001, which is the highest growth recorded since February 2001. A rise in infrastructure activity has helped in boosting production growth. SAIL and Tisco have already increased prices of flat and CR products by 8%-9%. Prices of HR coils and sheets have also been hiked.

Also, the agricultural sector is reported to have shown a strong growth of 7% in the quarter ended December 2001. This too is likely too is positive for the bourses.

One key area of concern is the rise in crude oil prices. Sooner or later persisting higher prices will result in increase in costs of production and this may result in higher inflation (if the manufacturer's are able to pass on the increase in costs). This will have an impact on interest rates, which so far have been soft on account of the benign inflation environment. However, if the increase in costs cannot be passed on, manufacturers would have to take a hit on margins. Either ways, higher prices will have an adverse impact. One alternative, which the press has taken interest in is that excise duties on petro products be reduced. But this will result in a higher than anticipated government deficit - which in some way impacts inflation/interest rates.

While in the near future the markets look for a direction, the long-term trend seems to be positive on the back of the recovery in the global and domestic economy. But one thing is clear. Somebody needs to pay up, to take care of higher crude prices.

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