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Accounting blunders hit US markets - Views on News from Equitymaster
 
 
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  • Jul 13, 2002

    Accounting blunders hit US markets

    Accounting practices again concerned the US markets, which recorded steep losses during the week. While the Dow closed below 8,700 marks, the NASDAQ was down by 5%. Mixed earnings reports and dour economic data fretted investors further.

    This time defensive stocks too joined the list of companies admitting inaccuracies in accounting. Merck reported that its Medco pharmacy benefits management business booked US$ 14 bn in revenues, which it never collected. Bristol-Myers Squibb was under investigation by US regulators, months after it disclosed sales tactics that inflated revenues late last year by US$ 1 bn Qwest Communication was also facing criminal probe from federal prosecutors.

    Earnings season has started and outlook from companies is not much encouraging. Alcoa and Allegheny Energy reported lower than expected results. GE’s profits on the other hand, rose by 14% and announced that it’s on track to meet its full year earnings. Tech companies’ results were mixed. Oracle indicated that demand outlook for its software products still remain uncertain while Dell raised its second quarter earnings and revenue guidance, citing gains in market share. Yahoo too reported profits in second quarter on higher revenues, after a strong of six consecutive quarterly losses.

    Economic data offered little support to the market, with one report showing a small uptick in producer level inflation. Another report reflected that the weekly number of Americans lining up for first time jobless benefits rose to 403,000, the highest level in six weeks. Consumer sentiment index too fell to its lowest level since November 2001 in July to 86.5 from 92.4 in June. Weak job market and fall in consumed sentiment concerned investors about recovery in the US economy.

    Infy shines
    (Price in $) 6-Jul-02 13-Jul-02 Change
    Infosys 53.5 56.9 6.4%
    Rediff 0.4 0.5 4.5%
    Dr. Reddy's 20.0 20.2 1.4%
    Satyam 10.6 10.7 0.2%
    VSNL 6.2 6.1 -0.6%
    HDFC Bank 13.3 13.2 -1.0%
    MTNL 6.0 5.9 -1.7%
    Silverline 1.6 1.6 -1.9%
    Satyam Infoway 0.5 0.5 -2.2%
    Wipro 28.4 27.3 -4.0%
    ICICI Bank 7.2 6.8 -6.1%

    Infosys was the star performer after the company declared its first quarter results, which was much above market expectations. On a QoQ basis, the company’s profits grew by 3.2% on a strong 12% jump in revenues. On a YoY basis, topline growth was significant at 25% and profit growth was at 14%. Even in the difficult environment Infy managed to add 23 new clients. The markets were however, worried about dip in Infy’s operating margins and its indications of delay in clients visit in June month. Nevertheless, healthy rise in volumes suggest that Indian software companies still have potential to attract business.

    Dr. Reddy’s was also up marginally. The company has received US FDA approval for its ANDA for Ciprofloxacin tablets. The drug is the generic equivalent of Bayer’s Cipro and is used for the treatment of several types infection. According to IMS 2001, the product had annual US brand sales of approximately US$ 1.2 bn.

    Internet ADRs, Sify and Rediff remained volatile during the week. Banking stocks lost ground at higher levels. ICICI Bank was the major loser, down by over 6%. Wipro also fell sharply. Fall in Wipro’s stock price to an extent reduced the valuations gap between Wipro and Infosys.

    Non-stop slide
    Indices 6-Jul-02 13-Jul-02 Change
    BSE 3,331 3,306 -0.7%
    Hang Sang 10,806 10,648 -1.5%
    Nikkei 10,826 10,601 -2.1%
    NASDAQ 1,448 1,374 -5.2%
    Dow 9,380 8,685 -7.4%
    Dax 4,483 4,131 -7.9%
    FTSE 4,616 4,224 -8.5%

    World markets seem to have pressurized by accounting frauds from corporate giants. As if dim earnings reports were not enough to shake investor confidence, corporate America is further spreading nervousness in the markets. While long-term trend looks uncertain, quarterly reports are likely to influence the near term movements of the markets.

     

     

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