X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Conspiracy theory or Random walk? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Apr 14, 2001

    Conspiracy theory or Random walk?

    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

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 18, 2017 (Close)

    MARKET STATS