Conspiracy theory or Random walk? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Conspiracy theory or Random walk?

Apr 14, 2001

The markets also commemorated Good Friday, as sentiments were hit with Infosys, the tech almighty, issuing markedly reduced earnings guidance sending the benchmark indices into a tailspin. This was the ninth consecutive weekly decline and only the second such drop post liberalization. The Sensex crashed by 10.9% this week, losing 7.6% in the last two trading sessions, which accounted for 70% of the drop. The nine consecutive weeks of decline is the first since November '94. Also, this week's drop is the fifth largest weekly decline seen on the BSE post liberalization.

As the markets seemed to be bottoming out, supported by a NASDAQ rally, the fresh round of bad news led to a nose-dive on the bourses. One cannot help wonder, with the constant flow of bad news, if this all is a conspiracy theory or just plain coincidence, random events, as they should be.

The weakness in the ICE sector and the markets was set by Zee and HFCL, which were named as the corporates supporting the activities of defamed stock broker, Ketan Parekh. The fear that the investigations will lead to more dirt being dug out could have dampened spirits leaving the markets weaker. However, the killer was the Infy results and earnings guidance. Although the results failed to meet expectations the revenue guidance of 30% decimated any positive sentiments that existed for the sector or markets. Infosys technologies have stated that the revenue and earnings growth for the next fiscal is estimated to be 30% and 33% respectively.

The announcement dramatically alters the perceptions regarding growth in the IT sector. Expectations, based on past meteoric, three digit, growth rates need to be re-looked at, which will have a sobering effect on valuations. Nevertheless, the guidance seems to be conservative and the belief is that the company will surpass the estimated growth targets.

The excesses witnessed in early 2000 have continuously been driven out of the markets, like also on the NASDAQ, especially in the TMT sector. Infy, which was quoting at Rs 10,067 last year at this time, has lost 72% of its value over the concerned period. The markets seem to have displayed strong efficiency, as prior to the guidance, Infy was quoting at a multiple of 41x FY01 estimated earnings, which is reasonably close to the future growth rate guidance given by the management. At the current market price of Rs 2,850 the company trades on a multiple of 30x FY01 earnings and 23x FY02 estimated earnings. If the markets believe the earnings guidance to be conservative then so are the valuations based on the same.

To arrive at some unbiased (free from IT hype) valuations one could fallback on the pre-indulgence period data. Infosys, in October '98, was quoting at Rs 585 (average for October '98) trading on an earnings multiple of 64x FY98 (trailing fiscal) earnings and 28x FY99 (current fiscal) earnings. At FY99 valuations it seems the markets, before the madness, had correctly estimated the long-term growth of Infosys. The management of the company has recently indicated long-term growth of 30%.

The markets seem to have reflected all the bad news. However, the lowering of earnings growth by Infosys is an ominous sign for the industry growth rates with a consequent re-rating of the sector. Also, fourth quarter result announcement from peers is not expected to be very encouraging with Infosys disappointing on this front. In such case the markets have lost one, near-term, key trigger for a rally. Results from the old economy counters could bring some cheer. However, it will take a lot for these counters to support any sustained rally.

The outstanding positions on the BSE have fallen from an average Rs 20 bn - 25 bn to Rs 9 bn. Confidence of the investors has been thoroughly tested over the last 45 days. Although markets look oversold it will take a while before the retail investors' faith is restored. In the meantime, sophisticated participants -- FIIs, mutual funds and other FIs -- could be the market movers. At these levels we could see some bargain buying in the old economy counters. Tech though has become an untouchable.


Equitymaster requests your view! Post a comment on "Conspiracy theory or Random walk?". Click here!

  

More Views on News

BSE Sensex Surges 707 Points; BHARTI AIRTEL Among Top Gainers (Market Updates)

Sep 25, 2020 | Updated on Sep 25, 2020

The BSE Sensex Surged 707 Points; BHARTI AIRTEL Among Top Gainers. Find the latest update, special reports and news on all time high gainers of BSE Sensex at equitymaster.com.

Your Queries on the 8-Year Cycle Answered (Fast Profits Daily)

Sep 25, 2020

You've sent in your queries on my videos on the 8-year greed and fear cycle in the market. I'll answer them in this video.

It's When You Sell that Counts (Profit Hunter)

Sep 25, 2020

How I alerted readers to the impending crash last week.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

How to Save Money by Exiting Stocks Before They Fall podcast (Views On News)

Sep 24, 2020

A penny saved is a penny earned. It doesn't matter where you enter. All that matter is where you exit. Watch this video to identify an opportune time to exit your investments and book profits.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Sep 25, 2020 03:36 PM

MARKET STATS