Indian Indices Trade Strong; Metal, Pharma Stocks Lead Gains

Fri, 23 Feb 01:30 pm

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After opening the day in green, share markets in India have continued the momentum and are presently trading above the dotted line. All sectoral indices are trading in green stocks in the pharma sector and stocks in the metal sector leading the gains.

The BSE Sensex is up by 266 points (up 0.8%) and the NSE Nifty is trading up by 92 points (up 0.9%). Meanwhile, the BSE Mid Cap index is trading up by 1.1%, while the BSE Small Cap index is trading up by 1.2%. The rupee is trading at 64.85 to the US$.

In news from the IT sector. In a move that could potentially hurt India's IT industry, the Trump administration has announced a new policy that makes very tough the procedure of issuing H-1B visas to those to be employed at one or more third-party worksites.

Under the new policy, the company would have to go an extra length to prove that its H-1B employee at a third-party worksite has specific and non-qualifying speculative assignments in speciality occupation.

Indian IT companies, which are among the major beneficiaries of H-1B visas, have a significant number of its employees deployed at third-party worksites.

The new move announced empowers the US Citizenship and Immigration Services (USCIS) to issue H-1B visas to an employee only for the period for which they have worked at a third-party worksite.

So, going forward, H-1B visas could be issued for a shorter period than the current practice of three years.

Effective immediately, the new guidance comes weeks ahead of the beginning of the H-1B visas filing season, which is expected to be April 2, for the fiscal year 2019 beginning October 1, 2018.

Companies seeking H-1B visas for their employees working at a third-party site, would now have an intensive paperwork to file before submitting their applications. This is set to add to the compliance and operational costs of India's IT companies catering to the US market.

At the time of writing, IT sector was up by 0.8%.

BSE IT Index vis-a-vis Sensex

The Indian information technology (IT) sector has been through the doldrums over the past few years. IT giants have seen flat to negligible growth in the past 3-4 years. However, going by the IT index performance in the past few months, there seems to be some fight left in the IT space. The BSE IT index has grown by 8% since August 2017 as compared to Sensex growth of 6% in the same time period.

This is in stark contrast to its performance over the past four years. The Indian IT Index has returned a meager 19% returns as compared to Sensex returns of 58% since 2013.

The sector has seen a major disruption in the business model. The shift from traditional IT services like application maintenance to analytics, cloud computing has hurt growth for almost all major IT companies.

Recent protectionist policies announced by the American government since Trump's appointment have further escalated their problems.

As a result, major Indian IT companies are trading at multi-year low valuations. Also, IT companies are moving towards an efficient business model whereby manpower for mundane tasks are being replaced by automation. It will be an interesting space to watch out for in the days ahead.

In news from stocks in the telecom sector. Another major consolidation is on the cards in the telecom space.

According to a leading financial daily, Bharti Infratel Ltd and Indus Towers Ltd-two of India's largest telecom tower firms-are planning to merge their businesses.

Vodafone India Ltd and publicly traded Bharti Infratel Ltd hold 42% each in Indus Towers. Idea Cellular Ltd owns 11.15% and US-based private equity fund Providence owns 4.85%.

Bharti Infratel was earlier planning to acquire a controlling stake in Indus Towers and make the latter a subsidiary.

According to that plan, Bharti Infratel was to acquire the stake it didn't own in Indus Towers in an all-cash transaction and later sell the combined business to external investors.

However, both Vodafone and Idea have decided to stay invested in the tower business and the original deal stands scrapped.

Notably, Vodafone India and Idea Cellular are set to merge this year to create India's largest telecom operator, surpassing Bharti Airtel Ltd.

The whole telecom business has been an underwhelming story so far. While the telecom subscriber base has increased from 300 million in 2008 to 1.2 billion in 2017, investors have little to cheer. The BSE Sensex has gone up 3.25 times in nine years, but the BSE Telecom Index has not moved an inch from its levels of 2008.

With the entry of Reliance Jio, the competition has intensified further, with a lot of the current players opting for consolidation in order to remain competitive. Reliance Jio's low cost offerings and strategy of capturing market share will further dent the sector. The sector has been a classic 'value trap'. While it always looks cheap compared to other sectors, it has failed to provide any reasonable returns. We also believe the situation is unlikely to change in the near future. For an investor, it's important to differentiate between 'value' and 'value traps'.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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