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Tech trouble - Views on News from Equitymaster
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  • Apr 16, 2005

    Tech trouble

    Last week's pre-earnings jitters only got magnified as some of the investor apprehensions (seemingly) came true this week with the big boy of Indian software, Infosys, declaring its results. The holiday-shortened trading week saw the benchmark indices close with near 4% losses. This was the second week in succession that the Indian markets witnessed weakness with the cumulative loss now at about 5.5% for the benchmark indices.

    Continuing from where it had left last week, the Indian bourses opened Monday's trade on a weak note and proceeded to trade lower until post-lunch, in the process breaching the 6,400 level on the Sensex. Though efforts were made by the bulls at this juncture to recoup some of the losses, a strong wave of selling in the final half-an-hour of trade saw the markets lose over 1%. However, Tuesday saw the markets bounce back pretty handsomely, which seemed largely on the back of news that monsoons for the current year are expected to set in early and are likely to be normal. It must be noted that 2/3rd of the Indian populace is dependent on agriculture as their earning resource. This news is a positive, as this could substantially improve the disposable incomes in the hands of rural India and consequently boost the demand for goods and services in the country thus benefiting the corporates.

    Tuesday's strength spilled over into Wednesday's early trade also. However, market participants were quick to pounce on this opportunity and take some profits off the table. With results season likely to gather heat, investors seemingly preferred to adopt a wait-and-watch approach before making any serious commitments towards equities. Further, while Thursday was a holiday for the stockmarkets, it was also the most important day for investors! This was because, software bellwether, Infosys was slated to announce its results. Other results on this day were that of Geometric Software, ABB and Reliance Energy. While we believe that Infosys' results were not out of sync and were largely in line with our expectations, it was a typical case of the market (always) wanting more (higher guidance) that led to the carnage amongst software stocks the following day. This triggered a huge sell-off across the board on Friday with the markets falling about 3% in a single trading session and Infosys sliding by near 7%!

    Now let us consider some key sector/stock specific developments during the week:

    • The biggest news this week for the Indian stockmarkets was tech major Infosys' 4QFY05 results. While the sequential topline growth for the fourth quarter of the fiscal has been decent, the profit growth has not been enthusing if one were to remove the effect of a one-time income from the sale of Yantra Corporation. On the margins front, while 4QFY05 margins have expanded sequentially by 60 basis points, those for FY05 have remained flat. The management's growth projections for FY06 seem suppressed considering the company's past track record, which seemingly triggered the bearish sentiments in the market. The stock was the biggest loser amongst index stocks this week (see table below). Other software stocks during the week

      Key gainers over the week (NSE-50)
      COMPANY Price on Apr 8 (Rs) Price on Apr 15 (Rs) % CHANGE 52-WEEK H/L (Rs)
      BSE-SENSEX 6,480 6,248 -3.6% 6,955 / 4,228
      S&P CNX NIFTY 2,031 1,956 -3.7% 2,183 / 1,292
      ABB 1,214 1,297 6.8% 1,349 / 491
      GUJARAT AMBUJA 404 421 4.3% 468 / 231
      DABUR 112 114 2.1% 145 / 60
      BHEL 777 791 1.8% 884 / 375
      GLAXO 704 716 1.8% 799 / 520

    • Reliance Energy, the power arm of the Reliance Group, also announced its 4QFY05 results this week. The company reported a 43% YoY jump in net profits for 4QFY05, while total revenues were higher by 81% during the quarter. The main driver of this increase in revenues and profits has been the performance of its engineering, procurement and construction (EPC) division, revenues of which grew by as much as 369%. Other income was also higher by 132%, aiding the jump in net profits. However, rise in income from the sale of electricity was flat at nearly 1%. The stock lost 3% during the week.

    • Engineering major ABB was another company to come out with its results. It reported a strong 63% YoY growth in its bottomline for the quarter ending March 2005 on the back of a 38% topline growth. While operational efficiencies led the bottomline charge, the topline was a factor of the execution of some of its strong order backlog and increased standard products and service businesses. The stock managed to buck the market trend and close with over 8% gains and was the biggest gainer amongst index stocks this week (see table below). Other engineering stocks during the week

      Key losers over the week (NSE-50)
      COMPANY Price on Apr 8 (Rs) Price on Apr 15 (Rs) % CHANGE 52-WEEK H/L (Rs)
      WIPRO 665 606 -9.0% 775 / 396
      ZEE TELE 144 132 -8.2% 189 / 100
      INFOSYS 2,128 1,957 -8.0% 2,423 / 1,031
      HINDALCO 1,346 1,253 -6.9% 1,500 / 720
      SATYAM 412 384 -6.9% 442 / 230

    • Another stock to have made a move contrary to the markets this week was that of Gujarat Ambuja. The stock shot into the limelight on the back of the news that the company would consider a stock split as well as a bonus issue in its board meeting that will be held on April 20. The company in its release to the BSE made this announcement. Apart from this, the company's March quarter results (3QFY05, as the company is a June ending company) and an interim dividend would be considered on the same day. Other cement stocks during the week

    Despite India Inc. results having met investor expectations as yet and crude oil prices also witnessing a sharp correction of nearly 12% to 13%, now much closer to the US$ 50 per barrel mark, the market disappointment was clearly owing to the lower-than-expected FY06 guidance by Infosys. However, the brunt of this was felt across sectors. Going forward, with the earnings season having already commenced, investors will now remain focused on the set of numbers that will be doled out by corporate India over the next couple of weeks. It is this India Inc. scorecard that will determine the trend of the markets in the near-term. However, we would advise investors to overlook the short-term market/stock movements and look at the long-term prospects of companies rather than basing one's investment decision on the quarterly performance of companies, which could be volatile. Happy investing!



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