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When market pundits fumble - Views on News from Equitymaster
 
 
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  • Aug 18, 2000

    When market pundits fumble

    The technology stocks have taken the world by storm. Analysts gave them whopping valuations as they anticipated high growth rates for these companies. These growth rates (80-150% y-o-y) were unheard of. Investors’ quickly jumped on to these stocks and the traditional blue chips faded away, even though they were giving decent returns. But when their valuations reached epic proportions, the bubble has shown signs of bursting any minute. This danger has put pundits across the globe fumbling about whether to back old economy or to make a call on the volatile tech stocks.

    While the pundits fumble, let us take a look at the middle of the road companies. By middle of the road, we mean companies who can traditionally be clubbed in the old economy but are geared (as a result of their technical capabilities) to provide sophisticated services that simplify processes for the traditional brick and mortar companies.

    The returns from such services segments are not as mind blowing as pure tech stocks but they definitely are way above the returns offered by traditional manufacturing companies (in between 15-30%). As markets get more competitive, companies are looking at ways to improve their operational efficiencies and streamline their costs. The industry is upgrading its manufacturing systems and replacing old pneumatic control instruments with sophisticated electronic equipment. This is where companies providing niche value added services like integration between management functions and shop floor activities stand to gain.

    One such segment is the Distributed Control Systems (DCS) in industrial automation industry. Tata Honeywell, ABB and Bhel are the three key players in this segment, which is growing at 15-18% annually. But this is only one of the segments. India’s current hardware to services ratio has been 60/40 as compared to a 30/70 ratio in the west. As hardware takes a backseat, niche services segment are likely to spring up. This will be an interesting segment to look out for.

     

     

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