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Significant week for IT

Apr 18, 2009

After recording strong weekly gains in the previous week, the Indian markets maintained their upward momentum this week, although, at a slower pace. The BSE-Sensex ended higher by 2% over the closing levels of last week. Barring Japan (down 0.6%), other Asian markets such as Hong Kong (up 4.7%), Singapore (up 3.8%) and China (up 2.4%) ended the week on a positive note. It may be noted that Asian stocks climbed for the sixth consecutive week, the longest streak of gains in more than two years, on increasing confidence that the worst of the global recession is over. As for other global markets, Germany (up 4.1%) and France (up 4%) led the pack of gainers. They were followed by UK (up 2.7%), US (up 0.6%) and Brazil (up 0.5%).Coming to the performance of sectoral indices in India, stocks forming part of the banking, capital goods and realty sectors emerged as top gainers during the week. The BSE-Bankex, the BSE-Capital Goods and BSE- Realty indices recorded gains of 9.5%, 6.4% and 6.1% respectively. However, stocks form the IT, energy and consumer durables spaces bore the brunt of profit booking. The BSE-Smallcap and BSE-Midcap indices continued their upward journey by recording gains of 4.9% and 3.4% respectively over the previous week.

The past week was a significant one for the IT sector for two major reasons The Satyam takeover by Tech Mahindra and Infosys announcing its FY09 results. We shall start with the latter first. Infosys recorded a topline growth of around 30% YoY during FY09. This growth was mainly on account of higher volumes. In addition, the company managed to expand its operating margins by 2% YoY mainly on account of the depreciation of the rupee against the US dollar. The company's net profits grew by 29% YoY during the fiscal aided by higher operating margins and a tax reversal. While the company's financial performance was decent, its earning guidance for the year FY10 seemed to disappoint the market. The management stated that it expects the company to earn an EPS of Rs 96.7 to Rs 101.2 per share for FY10, which is lower by 3% to 7% YoY as compared to its FY09 EPS.

The long-pending decision regarding the takeover of Satyam was finalised during the week. The company got its new owner in the form of Tech Mahindra, which was selected through a competitive bidding process. L&T and Wilbur Ross were the other two contenders in the fray. Tech Mahindra (through its subsidiary Venturbay Consultants Pvt. Ltd.) bid for Satyam at the price of Rs 58 per share to buy a 31% stake in it through a preferential allotment. The company has tied up with insurance companies and mutual funds for partially funding its deal to buy Satyam, wherein it will get Rs 8.8 bn funding from them. The balance funding of Rs 20 bn would be mobilised through a bridge loan from banks and internal accruals.

In other corporate news, Pfizer India announced that its parent company, Pfizer Inc., was looking to increase stake in the former for a consideration of US$ 136 m (approximately Rs 6.8 bn). The parent company announced that it plans to increase its stake to 75% from the current level of 41%. One of the obvious reasons behind this action is the fact that the stock price of the Indian arm is available at an attractive valuation. This coupled with the fact that the Indian pharma market is poised to grow at a faster rate than the pharma markets of the developed world has probably compelled the parent company to adopt this move. However, it may be noted that this also raises a concern over the intention of the parent, which could be looking to transfer wealth from minority shareholders to itself. If at all the company had best intentions in mind, a share buyback would have been a more prudent option given the ample cash that the Indian arm has on its book. Investors may recall a similar recent event wherein Swiss drugmaker Novartis AG announced its intention of upping its stake in Novartis India to 90%.

In other news, Pantaloon announced that it plans to divide its business into three separate companies for its FMCG & consumer durables, retail and fashion segments. The group is planning to raise Rs 11 bn to 12 bn from private equity players, who in turn will be offered shares in the newly-created companies. Further, it is looking to raise about Rs 3 bn to 4 bn through a preferential allotment to the promoters.

Engineering major, Suzlon was in the news this week, again for the wrong reasons. A leading business daily reported that the company is believed to be facing problems relating to WTG blades once again. Suzlon recently won a contract from its subsidiary, REpower, to supply blades for 75 turbines for a project in China. However, it is believed that REpower has rejected Suzlon's prototype for the initial blades for not meeting its quality standards. Suzlon was quick to response to this piece of news by stating that it has not yet delivered any blades to REpower and that those blades were still in the prototype phase of the manufacturing process. The company further stated that it will only commence manufacturing and delivery of blades after it completes this prototype phase. Due to the contradictory nature of the reports from the company and the media, it still remains to be seen what implications this issue will have for the company.

Source: Yahoo FinanceSource: Yahoo Finance

Source: SEBISource: BSE

Source: BSESource: BSE

Movers and shakers during the week
Company 9-Apr-09 17-Apr-09 Change 52-wk High/Low Change from 52-wk High
Top gainers during the week (BSE-A Group)
Jai Corp 129 187 45.0% 741 / 59 -74.8%
Rolta India 72 96 32.7% 344 / 41 -72.2%
IOB 52 67 27.8% 154 / 38 -56.8%
Indian Bank 91 115 26.8% 158 / 64 -26.9%
Unitech 42 53 25.1% 331 / 22 -84.1%
Top losers during the week (BSE-A Group)
Mahindra Finance 245 212 -13.5% 312 / 162 -32.2%
Videocon Industries 125 113 -9.9% 409 / 82 -72.5%
Titan Ind 886 800 -9.6% 1,317 / 668 -39.2%
Jet Airways 221 200 -9.3% 585 / 115 -65.8%
JSW Steel 347 316 -8.8% 1,178 /161 -73.1%
Source: Equitymaster

Inflation, as measured by the WPI, declined to 0.18% for the week ended April 4. The figure is lower by nearly 0.08% from the number recorded in the week ending March 28. As per a leading business daily, the decline is mainly on account of a higher base effect and falling prices of some manufactured products. Infact, inflation was at 7.71% during the corresponding week of the previous year. It may be noted that during the week, the prices of food items such as pulses, cereals and vegetables along with fuel items increased on a week on week basis.

As per the balance of payments (BoP) data released by the Reserve Bank of India (RBI) for the quarter ended December 2008, the current account deficit stood at US$ 14.6 bn as against US$ 4.6 bn in the corresponding period of the previous year, posting an annual rise of 217%. It is believed that huge defence procurement-related payments and advances for import orders in the backdrop of a depreciating rupee have inflated India's current account deficit to this record (highest in two decades) level.

In international news, Goldman Sachs announced its quarterly results during the week. The company posted a US$ 1.8 bn profit for 1QCY09, thus turning around from the red in the previous quarter. It is also planning a US$ 5 bn issue of shares in order to facilitate paying off its TARP debt (it had received US$ 10 bn and is keen to repay as soon as possible). Among business segments, fixed income, commodities and credit products did well, while advisory, investment banking and asset management performed poorly. Part of the answer lies in a little sleight of hand. It may be noted that Goldman Sachs switched its accounting period from fiscal year to calendar year. Previously, Goldman's fiscal year had ended in November. As a result, the December 2008 (a very bad month) performance was not factored in 1QCY09.


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