High five: Sectoral gains

On 4 May 2009, the Sensex registered its biggest single-day gain since October last year. The 6.4% (731 points) rise saw investors rushing to buy. "At these times, we know many won’t listen, but it really helps to avoid stocks with weak fundamentals," says Amar Ambani, vice-president of research, India Infoline.

Yes, the gains did fuel expectations that the economy might rebound faster than expected, but analysts like Ambani are not sure if the momentum is sustainable as the current rally is led by sectors (real estate, metals and IT) that are yet to see a significant pick-up in demand. But these analysts are not completely pessimistic. "Our recommended strategy is to be overweight in sectors focused on the domestic market," says Nischal Maheshwari, head of research, Edelweiss Capital. We take a look at five sectors that are the most preferred by analysts and the hottest stocks in each.

Automobiles

Last year was challenging for the Indian auto industry. High commodity prices in early 2008 squeezed margins, and by the end of the year, shrinking sales began to hurt. However, the industry has hit a smooth patch, with the government reducing excise duties and lowering rates on consumer loans. This has helped revive the demand for cars and twowheelers.

"We expect the passenger car industry to continue to improve due to the excise duty benefit and rural market demand, but the requirement for commercial vehicles is likely to witness pressure," says Umesh Karne, analyst, Reliance Money.

Hero Honda and Maruti Suzuki reported very good numbers in April 2009. The two-wheeler major has seen a 15.1% rise in sales volumes, while Maruti has registered a robust 29.5% growth. Maruti, in particular, is expected to benefit when the economy revives, despite the fact that the company’s fourth quarter earnings have taken a beating. "We think that the company is better placed than its peers to take advantage of any kind of revival in the passenger car industry to maintain its leadership position in the segment," states a report by the Mumbai-based brokerage firm, Sharekhan.

Capital goods

Rising commodity prices hurt the margins of capital goods and auto companies. Like the auto industry, capital goods were also hit by a decreasing order inflow due to the slowing capital expenditure. However, according to the February index of industrial production, the segment posted a robust year-on-year growth of 10.4%.

Analysts seem cautiously optimistic, though some companies are yet to see a definite revival of order inflows. Most analysts expect new orders to come from capacity additions in the power transmission and distribution sector as tendering activity for the Power Grid Corporation gathers pace. Analysts recommend that investors stick to firms with robust order inflows and a substantial order backlog. Large-cap companies such as Bhel and Larsen & Toubro are good options. In 2008-9, Bhel’s year-on-year order inflow grew by 18.7% to Rs 59,687 crore. With a total order backlog of Rs 1.17 lakh crore, the management expects the company to clock a robust revenue growth of 20-25%. "Bhel would be one of the few Indian large-cap stocks to have an earnings upgrade cycle in 2009-10, which would drive the next leg of outperformance," says Inderjeet Singh Bhatia, an analyst at Macquarie Securities.

Pharmaceuticals

Although the pharma sector has been a relative outperformer in the past one year compared to the broader market, analysts have some concerns. The last quarter saw a mixed bag of results largely due to forex losses, says Sarabjit Kour Nangra, vicepresident, research, Angel Broking. "Having said that, one could take a stock-specific approach, as the sector makes for a good defensive bet. Look at the companies in the contract research and manufacturing services space, which is likely to grow at 25-30% for the next few years," she says. Large generics players can also be considered. The swine flu pandemic could benefit companies like Cipla and Ranbaxy in the short term, as these have the technological capabilities to manufacture Tamiflu, the drug required to treat the disease.

"Cipla will benefit significantly from the sharp rupee depreciation. Its core earnings are expected to witness a 34% cumulative annual growth rate during 2008-11. The stock is a good buy considering that it is a strong player in the generics market with a foothold in developed markets," states a report by India Infoline. On the domestic front, a burgeoning middle class and changing disease profile are expected to fuel the growth of the pharmaceutical market by more than 12% a year.

Consumer goods

Popularly seen as a safe haven in times of trouble, FMCG companies continue to attract investors. The BSE FMCG index has lost only 10%, while the benchmark Sensex has lost 30% in the past one year. Historically, the sector has been resilient during economic downturns. According to research house Noble, in the previous downturn between 2001 and 2004, diversified FMCG companies such as Marico, Dabur and Godrej Consumer fared well.

Personal care companies like HUL, Colgate-Palmolive and Dabur are expected to benefit from the correction in palm oil and packaging material prices. A decline in copra prices is expected to help improve Marico’s operating margin. "We expect volume growth to remain robust and margins to expand for most FMCG companies," says Abneesh Roy, an analyst at Edelweiss Securities.

Colgate-Pamolive is the most preferred FMCG stock. "The company comes across as an allround performer with strong brands in oral care, leading distribution in the sector, shareholder-friendly dividend policy and a track record of boosting margins in times of top-line slowdown. We do not expect any weakness in revenues from a cyclical slowdown," says Jaibir Sethi, an analyst at the Noble group.

Telecom

Always a competitive industry, the telecom sector is beginning to see an intense struggle after the entry of Reliance Communications in the GSM arena. Despite competition putting pressure on margins, the industry has reported a robust growth rate in a slowing economy. According to analysts at Macquarie, GSM operators reported the highest net subscriber additions of 10.85 million in March 2009; between October 2008 and March this year, operators have seen a breathtaking increase in new customers. "The trend supports our bullish stance on wireless subscriber growth in India," says Shubham Majumder, an analyst at Macquarie.

Bharti Airtel, which has added 2.81 million subscribers in March this year, is seen as the best bet. Analysts say that the management is now focusing on revenue market share. "Superior subscriber profile, a healthy balance sheet and higher visibility of cash flows makes Bharti our top pick in the telecom sector," says Nishna Biyani, an analyst at Prabhudas Lilladher.

Going short in a big way

This fortnight we are taking an ‘aggressively timid’ view of the markets. Timid, because we are avoiding any fresh purchases or sales in Safe Wealth, where we have cash in hand to the tune of more than three-fourths of the portfolio. And aggressive, because we are taking up a sizeable short exposure in the Wealth Zoom portfolio. Before you question the choice of stocks, here’s the macro view of why we are shorting. Finance Minister Pranab Mukherjee’s budget will come and go in a day, but the CFO of our country will have to run the finances till the end of the Congress tenure. If my worst fears come true, then throughout this period, the government will have to borrow more and more, just to stay in the same place.

This ‘treadmill’ is likely to push up the interest rates, crowd out private sector borrowing and lead to depressed valuations and profits, even if some sectors were to expand revenues over the next few years. Interest rates have a cascading effect on the economy—at the very basic level, the cost of borrowing goes up and, therefore, profits fall. Apart from this, bond yields increase (leading to sharp writedowns of investment portfolios by banks, resulting in drastically lower profits). The investors, in turn, begin to veer towards debt and money moves out of equities. The PEs crack, so the markets tend to move lower to find prices which correspond to the reduced PEs.

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In addition, corporate India has been only too happy to rush into equity issuance after the current, not to mention sharp, pullback, which saw the Nifty rise from 2,700 to over 4,500. If increased global liquidity is, at least, a part of the reason for this (apart from India’s perceived ‘decoupling’), expect the taps to be turned off sometime soon. Monsoon worries and internal security concerns are the other negatives.

Meanwhile, here are the key fresh shorts in Wealth Zoom:

NTPC: Great business, terrific management, long-term growth assured...that is the general perception. But at well over three times the book value, and mandated to earn only 14-15% return on the capital invested for as long as it’s alive, why should NTPC figure on anyone’s buy list? I suspect some sensible people will dump their holdings.

Punj Lloyd: Great business, but a consistently rotten show by an apparently capable management over the past few quarters. This great builder of petro infrastructure seems to have lost its way in large, low-profit acquisitions, litigation losses and an over-stretched balance sheet. Very low margins, litigation risk, poor overall profitability and a large order book make Punj a good shorting candidate at almost 14 times the FY10 earnings.

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Larsen & Toubro: This is one company where a short really seems anti-national! But one look at L&T’s rich (and stretched about 24 times) valuations tells me that this frontliner can probably be shorted safely, for a while at least, as the budget arithmetic sinks in.

Tata Steel: Probably the most obvious of the shorts, Tata Steel is highly leveraged and vulnerable to international demand for steel. Also, Corus’ low-margin operations threaten to derail the Jamshedpur story. If debt service becomes an issue, we might see a crack back to October lows.

HDFC, Axis Bank: While the former has an unbeatable franchise in its home finance business, the latter is seen as an aggressive high-growth story in the private sector banking space. But at over 4.5 times the book value (and up over 100% from recent lows), would you not short HDFC? Ditto for Axis Bank, which is now kissing three times the book value and up nearly as much from recent lows on asset quality concerns.

Idea: What an idea! At 27 times the single-digit return on equity (RoE), stumbling on a sagging market share and not exactly up to the rapidly growing competition, this is the most compelling sell from the nowmaturing telecom sector.

Suzlon: Another bad boy of leveraging and a concept story rapidly going sour in the face of technical failures. This wind power equipment manufacturer is now on the lookout to sell a stake in Hansen, a gear making subsidiary. In the meantime, the company grapples with financing shortfalls for its stake in RE Power. For a 10% RoE, you can’t be willing to pay over 14 times one-year forward earnings in an uncertain environment. But you can short, which is what I’ve done.

GAIL: Caught on the wrong side of the petchem cycle, its plastics/polymers business should do badly for at least another two years, while gas transportation income is now regulated/capped. So, rising gas volumes (courtesy RIL’s KG gas flowing through its pipes) won’t translate to a proportional increase in profits. Sad, but true. And 17 times the FY10 earnings is a sure sell signal, especially since FY11 earnings are expected to fall further, going by consensus estimates.

Interestingly, of the eight listed long positions in the Wealth Zoom, most stocks have underformed compared with the previous fortnight. The lone exception is Mphasis Ltd. The biggest loser is Glenmark, which lost nearly 15%. But there is no need to short this one...yet.

Unitech promoter plans to raise stake by 10%

In a notification to BSE, Unitech said that it plans to take shareholders’ approval for issuing warrants to the promoters, also indicated its plans to issue securities to raise long-term funds.

A little over a month after diluting stake, the promoter Chandra family at Unitech Ltd, India’s second largest real estate firm by market value, is considering raising its stake by 10% through an issue of convertible warrants.

The promoters currently hold a 51% stake in the company. The Chandra family will invest Rs1,000 crore in the next 18 months by subscribing to the warrants, a person familiar with the development said on condition of anonymity. In June, Unitech will invest Rs275 crore to subscribe to the warrants, this person said. A warrant is a security that gives the holder the right to either buy or sell securities, usually equity, from the issuer at a specific price within a certain time frame.

The promoters will raise funds for buying the warrants by exiting from certain non-core businesses, the person said. This will be similar to their decision in February to sell their stake in Orissa Sponge Iron and Steel Ltd for around Rs40 crore. “Post capital infusion, (the) debt-equity ratio of the company will reduce a lot... This also shows the confidence and commitment of the promoters in the company,” the person said. In a notification to the Bombay Stock Exchange (BSE) on Tuesday, Unitech said it plans to take shareholders’ approval for issuing warrants to the promoters. It also indicated that it would issue securities to raise long-term funds but did not indicate the sum.

The board on Tuesday approved both the proposals. The company has called for an extraordinary general meeting on 16 June to take the shareholders’ approval for the proposals. “Clearly, fund-raising in this environment will be considered favourably by the markets,” an analyst with an international brokerage firm said, who declined to be named. “But it is not clear from where the promoters will get the money to increase their stake.” Last month, Unitech raised $325 million (Rs1,543.7 crore) through a qualified institutional placement (QIP), in an attempt to part-retire its short-term debt. A QIP is a private placement of equity shares or securities convertible to equity by a listed company with qualified institutional buyers approved by market regulator Securities and Exchange Board of India. The QIP was done at Rs38.50 a share and resulted in a 13 percentage point-dilution of stake of the promoter family to 51% from 64%.

In recent weeks, real estate developers have been trying to raise funds through the equity route either to reduce debt or fund projects. Last week, DLF Ltd, India’s largest developer by market value, said its promoters had sold a 9.9% stake in the company for Rs3,860 crore to raise money to buy out hedge fund DE Shaw and Co. Lp.’s investment in DLF Assets Ltd, also promoted by them, and to infuse fresh capital into the latter. Indiabulls Real Estate Ltd is also raising around $600 million through the QIP route. Unitech has a debt of Rs8,500 crore and plans to reduce debt through the sale of assets such as hotels, office complexes and ready properties. Shares of Unitech were up 10.61% to close at Rs70.90 on BSE, while the benchmark Sensex index was up by 0.12% and BSE’s realty index, an index of 14 real estate companies, jumped 12.80%.

Indian Stocks - Where do we go from here?

Just like the overall market, Indian ADR’s have struggled since 2008 rolled in.

Note: Videsh Sanchar Nigam Ltd. (VSL) is now called Tata Communications (TCL)

As far as I am concerned the only Indian ADR worth looking at this point is Sterlite (SLT). ICICI Bank (IBN) and HDFC Bank (HDB) are also worth considering but I would wait for a little better entry point.

As far as other ADR’s are concerned, I don’t see anything exciting at this moment. Let me know if you think otherwise. Any ideas would be welcome.

ETF’s/ETN’s/CEF’s

The recent launch of Wisdomtree India ETF (EPI) looks better than the India IPATH ETN (INP). Energy plays a bigger role in EPI and technology plays a bigger role in INP.

The Powershares India ETF (PIN) is about to launch as well. The ETF pick might end up being between Powershares India ETF vs. Wisdomtree India ETF.

Although the Indian markets have been hit by the turmoil here in the United States, India still remains an attractive investment destination. It’s certainly good to see the launch India ETF’s to give people more choices to invest in India.

Indian stocks best performers in 2009 so far

Indian stocks have provided a return of 59.30% year-to-date, against 34.37% gains provided by MSCI Barra’s emerging market index, covering all developing nations.

Indian stocks have emerged as the best performers among those in the emerging and the developed markets across the globe so far this year, giving investors the highest return of nearly 60%.

According to an analysis of MSCI Barra indices, a measure of returns from various stock markets across the world for foreign investors, Indian stocks have outperformed their global peers, including in the US, the UK and China in 2009 so far. Indian stocks have provided a return of 59.30% year-to-date, against 34.37% gains provided by MSCI Barra’s emerging market index, covering all developing nations.

Indian stocks have even outperformed all the developed world markets covered by MSCI Barra, as the markets in the US and the UK gave returns of just 2.33% and 10.17%, respectively, so far this year. Among the emerging Bric (Brazil, Russia, India and China) nations, the Brazilian market was the closest competitor with gains of 56.89% till 26 June year. The Chinese and the Russian markets have given returns of 36.77% and 41.61%, respectively, in the year so far.

The 30-share benchmark index of Indian stocks, Sensex, gained over 5,000 points in the year so far to settle at 14,764.64 points on 26 June compared to 9,600 levels on December 31, 2008.

Other emerging markets which gave over 50% returns so far this year include Indonesia (55.85%) and Chile (51%).

Analysts opined that the Indian markets have been rising on the positive global cues and got a positive spur from the decisive mandate in favour of Congress-led UPA in the general elections.

“The Indian stocks have been on a recovery path primarily in the past three months due to election results and on expectation of new government spurring the economic reforms in the country in the days to come,” an analyst from a leading brokerage said. Meanwhile, other developed markets including Canada gave 25% returns, Sweden (21.42%), Norway (24.70%) and Japan (2.45%), according to the data. Further, Indian stocks have also performed significantly better in the past three months period up to 26 June and have given foreign investors returns of 62%. The Brazilian markets gave returns of 40%, Russia 34.37% and China 34.98% in the three months.

Unitech: better days ahead

Demand for Unitech’s shares have picked up considerably in recent months owing to the pickup in demand for housing and, more importantly, a big improvement in the company’s balance sheet.

Shares of Unitech Ltd rose 5% to Rs82 in a weak market, giving the impression that its results for the quarter ended March were better than expected. But according to an analyst, the results are a non-event.This is simply because much has changed since the March quarter for the company. In any case, Unitech’s consolidated operating profit fell by 74% in the March quarter, which isn’t much better than the rest of the industry. In other words, there’s nothing in the March quarter results to warrant fresh buying. Still, demand for Unitech’s shares have picked up considerably in recent months owing to the pickup in demand for housing and, more importantly, a big improvement in the company’s balance sheet.

Unitech’s consolidated operating profit fell by 74% in the March quarter, which isn’t much better than the rest of the industry. Ahmed Raza Khan / Mint

About a month after market sentiment improved (mid-March), Unitech moved quickly and made a placement of shares worth Rs1,620 crore with institutional investors.

In the past few months, it has also sold some assets including a hotel and raised about Rs1,000 crore. Prior to that, it restructured short-term debt in order to reduce near-term cash outflows.

The company has also approved a plan to issue warrants worth Rs1,150 crore to the promoter group, which will pay 25% of the amount as advance to subscribe to these warrants. While the share issuances are diluting equity substantially, hardly anyone’s complaining since the high debt on the company’s books was a cause of big concern. In fact, Unitech shares had fallen to as low as Rs25 on the National Stock Exchange earlier this year, which according to some analysts reflected the markets’ concern that the company ran the risk of defaulting on debt and eventually running into bankruptcy. Some of the proceeds from the equity issuances have been used to retire debt, which will reduce the debt-equity ratio substantially.

Motilal Oswal Securities Ltd estimates that the company would be able to reduce its debt-equity ratio from 1.9 times to 1.1 times. With the simultaneous improvement in home sales, the company’s results should look much better from the June quarter onwards, on a sequential basis. A number of brokerages are positive on the stock at current levels, with some of them estimating that demand for housing will continue to improve and prices will rise from the next fiscal year. Considering that much of the froth has been taken off Unitech’s valuations and that the company’s balance sheet is in much better shape, the risk of a sharp downside, at least, certainly seems limited.

The relief rally in the bear market is close to finishing

There certainly is more liquidity in markets and that has helped the rally in Asian stocks.

Chairman of securities house CLSA Asia Pacific Markets Rob Morrison shares his views on the Indian and global markets in an interview. Edited excerpts:

Where have the global equities reached after the last three weeks?

I would certainly sit in the camp of those who believe that the relief rally, and I think it’s a relief rally, in an overall bear market is close to finishing.

What makes you say that the trend has not turned?

Hopeful: CLSA’s Rob Morrison says he does not expect Asian markets to retest their lows of last year.Ramesh Pathania / Mint

If you look at the valuations overall, and CLSA’s universal stocks that we cover, we are currently sitting at 17-18 times 2010 earnings. That is fully priced, particularly as there is certainly no absolute transparency on the 2010 numbers and there is certainly some potential for some downward surprises on the 2010 numbers. So 17-19 times earnings you have got to say is taken—that the good news is there. I really don’t think that this rally will last much longer.

If the rally is propelled by liquidity and momentum, do you think there is more left in that liquidity gush?

There certainly is more liquidity in markets and that has helped the rally in Asian stocks. There is no question about that. When you sort of return to greater liquidity, liquidity goes looking for the best investment stories. And our view, CLSA’s view, is definitely that Asia remains the best investment story—short-term, medium-term, long-term—Asia remains the best investment story. So, with additional liquidity, that did help spur markets over here. But they have all had very strong rallies. So liquidity plays a factor in terms of keeping markets moving, getting them started. But it doesn’t sustain them. As I said before, I think that the numbers based on 2010 numbers, these markets look fully priced.

What will trigger off the correction?

I think there won’t be a single event; there is no single trigger there. It is more, as you said, that people understand that valuations are now starting to get stretched.

There is going to be a series of events. I would expect most of those events to focus around Europe. I think the news out of Europe in the months ahead won’t be positive. And that is probably going to put pressure on equity markets.

(Has the market hit) bottom yet... Are you talking about S&P or are you talking even about Asia?

When I said we have not seen the bottom, I was talking about economic fundamentals, or economies. I don’t think we have seen the bottom in terms of some of the key asset prices. For example, housing in the US, I don’t think we have seen the bottom there. We certainly haven’t seen the bottom in Europe yet.

In term of the S&P, as a house CLSA, our view would be it probably peaked somewhere close to that 1,000 number, very close to that at the moment. And then, if that is the case, you would probably be picking numbers around 500-580, something in that sort of vicinity. I don’t think—and to be fair, as a house, it surprised us—the impact on Asian markets through 2007-08, I don’t think we go back to test those lows on Asia. I think there are good reasons why we shouldn’t go back and test those lows. But who knows, last time I didn’t expect Asian markets to react as badly as they did to what was happening in the US. But my expectation would be that Asian markets don’t retest those lows.

How much probability would you attach to the event or likelihood of India going back to its old peak sometime in the next 12 months? Even if there is a correction looming right now, do you think in the next 12 months we can get back to the Sensex highs of 21,000 points?

Not in the next 12 months. Some of the things that will help move the macro economy picture in India would be the pick-up in capital expenditure. I think there is a great deal of capex at the moment. A number of Indian companies were waiting until they have seen the outcome of the election. Also, there have been obvious issues around funding. But I think, with the election out of the way, you will see a pick-up in capex spending, you will also see greater spending from the government... That’s all going to help through 2010, but I don’t think that’s going to fuel a strong equity market rally... But 2010, I think, will be a very good platform for future investments...

Beating estimates, Infosys raises hopes

The software services exporter’s revision of its 2009-10 revenue forecast in dollar terms was due to cross-currency movements.

The country’s second largest software services firm, Infosys Technologies Ltd, beat profit estimates for the first quarter (Q1) as it cut jobs and costs. The company raised its full-year forecasts, and the stock markets responded favourably to its scrip as well as those of other large technology firms.

The exchange’s benchmark Sensex index declined 1.84% to 13,504.22 points.

However, Infosys, considered a standard bearer for India’s technology sector, expects contract prices to drop further by 5% during the fiscal year, due to pressure from clients and stronger competition from foreign rivals such as International Business Machines Corp. (IBM) and Accenture Ltd amid a global slowdown. But it also sees clients in the downturn-hit US moving more work offshore to low-cost locations such as India, though they may take a while to resume spending on technology.

“The consensus opinion is that recovery is expected by the middle of 2010,” chief executive officer and managing director S. Gopalakrishnan said after announcing the results on Friday. “This is still a growth industry; we have to prepare ourselves for that.” Infosys’ higher profit and raised forecast, and the talk of a potential recovery after months of gloom sent the company’s shares up 5% in intraday trading, before they ended the day 3% higher at Rs1,726.50 on the Bombay Stock Exchange. The exchange’s benchmark Sensex index declined 1.84% to 13,504.22 points.

Sector Review: Banking

We expect PSU banks to continue cornering a lion’s share of incremental business over the next 12 months.

Our expectation is based on GoI’s commitment to recapitalize PSU banks for unlocking the lending freeze and reviving the credit markets. We believe that over the next one year, the larger PSU banks would outperform their private sector counterparts in terms of balance sheet expansion and credit quality control. Our demand-side analysis of credit off-take suggests expansion of credit in the 16-18% range, driven by infrastructure (primarily power and telecom), housing (and ancillary industries), pharmaceuticals, autos, and textiles.

On the supply side, our credit growth estimates for the top eight banks under our coverage universe (51% of overall bank credit) indicate a credit expansion of ~19% during FY10E. At an aggregate level, we expect a sharp increase in the systemic gross NPAs for banks, from ~Rs800bn (as of Mar’09) to Rs980bn (by Mar’10). We, however, believe that the valuations (just prior to the recent surge) factored in risks that were overplayed in the domestic context without taking due cognizance of levers (like coverage ratios) employed by banks to tide over tough times. Our estimates build in a scenario of restructuring the loan book to the extent of 4% during FY10E. We expect banks within our expanded coverage universe (except ICICI Bank) to report close to 20-30bps y-o-y drop in NIMs during H1FY10E. However, by H2FY10E, the liability-side re-pricing at a portfolio level would begin reflecting in a lower cost of funds, partially cushioning the decline in margins.

Risks/Valuations

Our investment thesis is anchored on expectations of a revival in credit demand from H2FY10E. A more prolonged period of subdued systemic credit growth would be negative for all banks within our coverage universe. Our assumptions on incremental delinquencies factor in ~12-18% of slippages coming through from the restructured portfolio (restructuring for FY10E assumed at 4% of loan book). Any slippages beyond these levels would be negative from a valuation perspective. We initiate coverage on Bank of Baroda, Bank of India, and Union Bank of India with a BUY rating and on HDFC Bank with a NEUTRAL rating. We recommend Union Bank of India and Punjab National Bank as the top picks within our PSU universe.

Top 10 companies add Rs32,000cr in a week

The coveted club, which comprises of four private sector and six public companies, added Rs32,354 crore to their market valuation to Rs16,04,896 crore.

The country’s top-10 firms added Rs32,000 crore to their market capitalisation last week, with public sector oil firm Oil and Natural Gas Corp (ONGC) contributing the major chunk.

ONGC added Rs20,052 crore to its market-cap, taking the total valuation to Rs2,42,687 crore during the week ending 3 July. Shares of the company surged 9% to settle at Rs1,134.65 on the BSE at the end of Friday’s trade. The coveted club, which comprises of four private sector and six public companies, added Rs32,354 crore to their market valuation to Rs16,04,896 crore.

The total market-cap of the elite club stood at Rs15,72,541 crore in the previous week.

The club saw five companies ONGC, National Thermal Power Corporation (NTPC), Bharti Airtel, Minerals and Metals Trading Corp (MMTC) and State bank of India added Rs39,414 crore to their market-cap, respectively.

Meanwhile, the other five firm including Reliance Industries, National Mining Development Corp (NMDC), Bharat Heavy Electricals (Bhel), Infosys Technologies and Larsen & Toubro lost Rs7,060 crore in their market cap past week. The country’s most-valued firm, Reliance Industries Ltd, lost Rs441 crore from its market valuation, which stood at Rs3,18,832 crore at the end of Friday’s trade. RIL had a market valuation of Rs3,19,273 crore in the previous week.

Trading firm MMTC jumped to fourth place from fifth adding Rs6,228 crore, while private telecom services provider Bharti Airtel slipped to fifth position from earlier fourth, even after adding Rs1,466 crore to its market cap. At the end of the week, total market valuation of MMTC stood at Rs1,57,565 crore and Airtel at Rs1,55,144 crore.

Mining firm NMDC lost Rs4,024 crore from its market cap, while SBI added Rs3,917 crore.

The total market valuation of NMDC stood at Rs1,42,947 crore and SBI at Rs1,14,955 crore for the week ended 3 July. Power equipment supplier Bhel lost Rs952 crore and IT bellwether Infosys lost Rs1,438 crore from their market cap. The total market valuation of Bhel stood at Rs1,06,816 crore and Infosys at Rs1,03,202 crore. Engineering and construction major Larsen & Toubro saw its market value erode by Rs205 crore to stand at Rs94,251 crore.

Promoters seek to regain pledged stock

At least 77 of the 667 companies whose promoters had pledged shares last year have repaid some creditors.

The rebound in stock prices since the start of the current fiscal has increased the notional wealth of company promoters and helped them redeem part of the stock they pledged in return for funds when the going wasn’t so good. At least 77 of the 667 companies whose promoters pledged their shareholdings last year have repaid their creditors and redeemed their collateral, according to data filed by these firms with stock exchanges.

The companies include realtor Unitech Ltd, auto maker Tata Motors Ltd, software firm Tata Consultancy Services Ltd (TCS), wind turbine manufacturer Suzlon Energy Ltd, Jindal Steel and Power Ltd, and construction and cement company Jaiprakash Associates Ltd.

In the last fiscal, when the world plunged into a financial crisis and credit crunch as liquidity dried up, many promoters were forced to pledge part of their shareholdings as collateral to raise cash.

As of 31 March, the value of the total amount of shares pledged was about Rs78,000 crore.

Several top companies did not pledge their shares. In fact, only one-third of the firms that make up the Sensex reported such share pledges. Among the National Stock Exchange’s Nifty 50 stocks, there were only 12 such firms.

The promoters of India’s most valuable firm, Reliance Industries Ltd, and Bharti Airtel Ltd, the country’s biggest mobile phone company, have not pledged their shares. Both the companies are part of the Sensex as well as Nifty.

The current rally in the stock markets has changed the scenario. The Bombay Stock Exchange’s (BSE) Sensex, India’s most widely tracked equity index, has gained about 54% since the start of the fiscal year on 1 April.

When share prices decline, lenders typically ask for more shares to be pledged as collateral. If the borrowers fail to do so, the lenders sell the pledged shares to recover money.

Conversely, when there is a sharp rise in stock prices, fewer shares have to be pledged as collateral to raise the same amount. Indeed, many companies have not redeemed all their shares. For instance, the promoters of Suzlon Energy have redeemed one-third of the shares they pledged.

The wind energy firm’s promoters had pledged 25.85% of the company’s equity, or 387.2 million shares, to lenders. Promoters of Tata Chemicals Ltd have redeemed 12.74% of the pledged shares. Three of its promoters—Tata Tea Ltd, Tata Sons Ltd and Tata Investment Corp. Ltd—had pledged 20.02% of the company’s equity with their lenders.Similarly, Tata Sons Ltd, promoter of TCS, also partially redeemed last week the shares it had pledged with lenders. According to Gopal Agrawal, head of equity at Mirae Asset Management, the promoters of Indian companies are becoming cautious and reducing their debt levels. However, he is not reading too much into this as “when prices (of shares) are going up, it’s normal to redeem shares”.

Analysts also noted that many promoters are unwinding their positions as they come into money, with the economy looking better.While the credit growth rate has not reached the breakneck speed of the boom years between 2003 and 2007, it has improved, and companies are seeing higher demand from consumers.Indeed, broking firm Motilal Oswal Securities Ltd said “the worst is over” for Indian company earnings.

“From a quarter of ‘fading darkness’, we move on to a quarter of ‘new hope’,” it said in its quarterly earnings preview report for the three months ended June.Software bellwether Infosys Technologies Ltd is to kick off the earnings season on Friday.The Index of Industrial Production, or IIP, grew 1.4% in April, the first time in four months that it did not decline, even as exports continued to contract in May.The World Bank has upgraded its growth estimates for India this year to 5.1% from an earlier 4%, and expects India to be the fastest growing major economy next year. There is nothing illegal about pledging shares. Investment bankers say private lenders have always asked for shares to be put up as collateral when they lend money. They didn’t have to make this information public.

But after it was found that Satyam Computer Services Ltd founder B. Ramalinga Raju, who in January confessed to a Rs7,136 crore accounting fraud, had pledged nearly all his stock in the firm with lenders to raise money, the Securities and Exchange Board of India made it compulsory for listed entities to disclose information on share pledges by promoters in a bid to improve transparency. Companies typically don’t have to disclose such information if their promoters pledge shares in unlisted group firms.

End of India premium story; more global now?

If the markets remain weak, the damage could extend beyond stocks to the corporate sector


In spite of faltering global markets, the Indian market had run up sharply in the last few days on hopes that the finance minister would, by some magical process, not only deliver higher spending that would lead to higher growth but would also somehow manage to keep the fiscal deficit in check. In fact, the bond markets too had been rallying on hopes that the fiscal deficit would be contained at around 6% of GDP.

What’s more, practically every analyst had said that valuations in the Indian market had gone too high, ignoring negatives such as the weak monsoon, the high fiscal deficit and persistently high food prices.

So while the 5.8% drop in the Sensex is the biggest ever on a budget day, in many ways the markets have themselves to blame for having heightened expectations. While the market expected announcements on all those issues that excite it, such as reforming subsidies, increasing foreign direct investment caps, abolishing the securities transaction tax and disinvestment, the fact of the matter is, as one equity strategist put it pithily, that the government figured it had managed to sustain growth by going in for a big fiscal push last year, so why not have more of the same.

The other factor was that there were very few Nifty short positions leading up to the Budget, as the bears had been badly hurt by the mauling they got after the elections. So when the markets fell, there was no short-covering and the fall was therefore very steep. Short positions must have been built up on Monday, though.

Of course, the Budget did disappoint in areas such as the plan for disinvestment and that of pricing of petroleum products. The target of Rs1,100 crore for disinvestment is woefully low considering the gravity of the fiscal situation. But as far as pricing of petroleum products go, the government already took the step of raising prices before the Budget and has now announced that a new viable and sustainable system of these products is being looked into.

The increase in the minimum alternate tax (MAT) rate is obviously a negative for companies such as Reliance Infrastructure Ltd and Reliance Industries Ltd. Thankfully, the proportion of companies that pay MAT is relatively less. Besides, tax paid under MAT can be used as a credit for ten years when these companies come out of the MAT regime and hence may not necessarily be a negative for all companies; by that logic, MAT is a kind of advance tax. But for some companies, the book profit (on which MAT is calculated) has been higher than the taxable profit for years on end and they haven’t availed of MAT credit. For such firms, the hike in the MAT rate is a definite negative. Analysts say much of the fall in the later half of the session was on a reading of the fine print of the MAT changes.

Interestingly, the BSE Capital Goods index was among the worst hit, falling by 7%, though there are ample outlays for both rural and urban infrastructure spending. But as Sandeep Sabharwal of Prabhudas Leeladhar Pvt. Ltd points out, valuations of large-cap capital goods companies had risen sharply in the run-up to the Budget and a correction was due. The BSE Bankex fell by at least 8%, as higher bond yields will lead to losses on treasury holdings. Bank stocks, too, had outperformed the broad market.

On the other end of the spectrum, FMCG (fast moving consumer goods) stocks gained by 1%, as the markets were enthused about the increased rural spend and the increase in incomes through the cut in personal tax surcharge and the removal of fringe benefit tax.

ITC Ltd gained at least 3% on relief that taxes on cigarettes were not raised in the Budget. Auto stocks fell by around 3% on an average, lower than the rate at which the broad market fell, for the same reasons. Besides, the stimulus package announced for the sector has been maintained, which is also a positive. IT stocks, too, were relatively better off thanks to the extension of the sunset clause on tax incentives for units that operate in software technology parks by one year. The removal of FBT (fringe benefit tax on perquisites) is also a large positive for the sector. Many companies in this sector, however, pay MAT and the increase in the MAT rate will result in higher tax outflow. But since MAT credits are available for 10 years, this is only a timing issue and there would be equivalent savings on taxes in future years, when these companies come out of MAT.

If the markets remain weak, the damage could extend beyond stocks to the corporate sector. Companies had started raising funds through QIPs (qualified institutional placements, or sales to certain categories of buyers, largey financial institutions) to repair their balance sheets and provide a cushion against the downturn. That option would no longer be open to them.

What of the future? The special India story triggered by the election results and sustained on hopes of a dream budget is now over for the time being. The hope was that India would continue to enjoy its premium over other markets in the region based on a reform agenda. That hope has now been dashed. The Indian market can now be expected to move more in sync with global markets.

Missing monsoon clouds status of consumer goods shares

The consumer goods stocks may well be at the threshold of a difficult period, if the India Meteorological Department’s prediction of a below-normal monsoon comes true.

hares of companies making personal and home care products have behaved as classic defensives in the past year and a half.

While the BSE 100 index on the Bombay Stock Exchange has fallen by 36% since 1 January 2008, the BSE FMCG index has risen by 1%. In the past one month, too, while the broad market has corrected by about 11%, these shares have risen by 6%. It’s interesting that investors chase these stocks when markets correct, especially keeping in mind that their valuations aren’t cheap. BSE’s FMCG index trades at a past price to earnings multiple of 27 times, compared with 20 times for the BSE 100 index.

Subsidiaries of multinational companies such as Unilever and Nestle have traditionally enjoyed a premium over market valuations owing to their relatively stable earnings growth, high capital efficiency and liberal dividend payouts. In recent years, even valuations of domestic consumer goods firms have risen sharply primarily because of consistent earnings growth.

But these stocks may well be at the threshold of a difficult period, if the India Meteorological Department’s (IMD) prediction of a below-normal monsoon comes true. This year’s south-west monsoon is expected to be 93% of the average. Uttar Pradesh, Punjab, Rajasthan, Haryana, Chandigarh, Delhi, Uttarakhand, Jammu and Kashmir and Himachal Pradesh are likely to receive just 81% of the average, IMD has predicted.


According to Citigroup Research, consumer goods stocks tend to underperform the market over a 12-month period after a weak or deficient monsoon. Also, the last three times monsoons have been deficient, private consumption has dipped sharply. Between fiscal 2001-02 and 2004-05, when the monsoon was deficient for two years, revenues of these companies grew at a compounded annual growth rate of 3% and their earnings growth was flat.


Of course, the contribution of agriculture to the overall economy has reduced considerably since then and the impact of a below-normal monsoon will be lower this time around. Besides, the recent Budget’s rural thrust, which includes the extension of the farm loan waiver till December this year and a liberal rural employment scheme, should help companies weather the storm to some extent in rural markets.


Still, unless the monsoon in July and August makes up for the shortfall, rural consumption will be hit. For companies such as Hindustan Unilever Ltd, rural India contributes to around 50% of revenues. Note that urban consumers had also cut back owing to the economic slowdown and spending hasn’t recovered fully.


With valuations of the major companies at around 30 times earnings, there is room for a sharp correction if the monsoon actually ends up being deficient.

Smaller companies end up paying higher taxes

State-owned companies have higher effective tax rates than private firms.

The effective tax rate for companies, while much lower than the statutory tax rate of 33.99%, has been slowly going up in recent years. In 2005-06, the effective tax rate for a sample of 301,736 companies was 19.26%, according to the Budget documents. In 2006-07, for a sample of 328,061 firms the rate was 20.6% in 2007-08, a sample of 410,451 companies showed an effective tax rate of 22.24%.

Of course, the overall number conceals wide divergences in rates among companies. In 2007-08, for example, while the average effective tax rate was 22.24%, 16.4% of the companies in the sample, which accounted for 44.6% of total profits, had an effective tax rate of 0-20%. At the other extreme, 10.7% of the companies, accounting for 14.3% of total profits, had an effective tax rate of above 33.99%.

Bigger firms have a lower tax rate as they are able to avail of the loopholes more easily. In 2007-08, for instance, companies that had profits before tax of less than Rs1 crore, which accounted for the majority of companies, had an effective tax rate of 24.04%.

By contrast, firms with profits before tax between Rs50 crore and Rs100 crore had an effective tax rate of 20.14%. The largest companies with profits before tax in excess of Rs500 crore had an effective tax rate of 21.85%. But while the rate of the smallest firms has come down marginally, that for the larger companies has increased between 2005-06 and 2007-08.

State-owned companies have higher effective tax rates than private firms. For the former, the effective tax rate went up from 23.35% in 2006-07 to 25.69% in 2007-08.

For private companies, the rate was 21.28% in 2007-08, compared with 19.5% in 2006-07. While services companies have a lower overall effective tax rate than for manufacturing companies, effective tax rates increased for both in 2007-08.

The Budget documents also show the effective tax rates in various industries. In 2007-08, these ranged from a low of 3% for sugar manufacturers to a high of 40% for legal professionals. For IT-enabled services and business process outsourcers, the rate was 15%, while it was 12% for software developers. Property developers had an effective tax rate of 18%. Most of the manufacturing industries had tax rates between 16% (power and energy, tea and coffee, textiles) and 31% (printing and publishing).

Sensex lifeline: high beeps and pratfalls

CNBC-TV18 meets the top gainers and losers and finds out what the players feel about Friday’s markets

SREI Infra (11.84% down)
SREI Infrastructure Finance Ltd declined 11.84% after CNBC-TV18 reported that the ministry of corporate affairs is examining SREI’s links with Maytas Infra Ltd for possible fraud and financial irregularities in various projects. The firm claimed that its exposure to Maytas Infra is minimal.

Dish TV (7.62% down)
Shares of Dish TV India Ltd ended down 7.62% to close at Rs33.35 on the National Stock Exchange on Friday. The stock has been under pressure after finance minister Pranab Mukherjee, in the budget presented on 6 July , raised customs duty on set top boxes from 0% to 5%.

Praj Industries (8.13% down)
Shares of Praj Industries Ltd ended down 8.13% on the National Stock Exchange after the company reported not-so-encouraging results. The firm’s first quarter stand-alone sales was down 18.3% to Rs126.42 crore, compared with Rs154.76 crore, and its net profit rose 2.34% to Rs 25.33 crore.

VST Industries (10.16% down)
Shares of VST Industries Ltd declined 10.16% to close at Rs350.30 on the National Stock Exchange on Friday after Rajasthan became the third state to raise value added tax (VAT) from 12.5% to 20%. Earlier, two other states—New Delhi and Maharashtra—had proposed to raise VAT.

Bajaj Hindusthan (9.66% down)
Shares of Bajaj Hindusthan Ltd fell 9.66% on Friday after falling 5% on Thursday. Prior to this, the stock had risen on reports that the firm would be restructuring its balance sheet. The company is planning to sell shares through the qualified institutional placement route.

Infosys (2.60% up)
Shares of Infosys Technologies Ltd gained 2.6% on Friday. The country’s second largest software exporter, reported that profit rose a better- than-estimated 18% for the quarter ended June, helped by currency gains. The firm, however, warned of a challenging global environment.

JP Hydro (8.6% down)
Shares of Jaiprakash (JP) Hydro-Power Ltd fell 8.6%. Kotak Institutional Equities has recommended shorting the stock post JP Hydro’s merger with JP Power Ventures. It values JP Hydro at Rs50 and estimates the merger to be neutral for JP Associates interest in power.

JK Tyre (3.82% up)
Shares of JK Tyre and Industries Ltd were up 3.82% on the National Stock Exchange on Friday as the market expects the firm to post good results due to lower rubber prices. The price of domestic rubber fell from Rs100 per kg to a low of Rs50-60 per kg in the January-March period.

Education sector firms: new investment destination for PE

The market for e-learning is growing at a healthy clip

Private equity firm Helix Investments Co. has invested about $10 million (Rs48.9 crore) in LearningMate Solutions Pvt. Ltd, a Mumbai-based provider of electronic learning solutions.

E-learning market is peaking speed of late.

LearningMate will use the equity infusion to expand in the US and India, said chief executive and co-founder Samudra Sen. The company currently employs 200 people.

For Helix Investments, this is its second investment in an education company. In August 2007, the firm invested $12 million in Mahesh Tutorials, a Mumbai-based test prep company.

Helix is an India-focused investment fund backed by members of the Cullman and Bloomingdale families of New York.

Companies in the education sector—either as a provider of technology and content solutions to the industry or a direct provider of education—have emerged as investment destinations for private equity firms.

The market for e-learning is growing at a healthy clip. In the US, there has been a move in recent times towards online and digital courses and away from printed text books, which is being supported by large government funding.

This has attracted private-equity interest in a market that is worth about $1 billion a year in the US alone and growing at an annual 40%, according to industry estimates. Some companies providing e-learning solutions are trading at price to equity multiples of 25 to 30 in Nasdaq, the well-known electronic stock market in the US.

Recently in the US, there has been a move towards online and digital courses

LearningMate, founded in 2001 by Sen and Atul Sabnis, was a part of Educomp Solutions Ltd. The company was hived off as a separate entity in 2003 and Educomp was bought out by the TC Group Llc., a private equity investor. Carlyle later exited the company.

Sen and Sabnis had earlier helped establish and manage e-learning content development for Aptech Ltd, which later came to be known as Mentorix Learning Technologies Pvt. Ltd.

LearningMate’s services include content development and solutions related to learning applications and learning management systems. The firm’s customers include publishing firms such as the McGraw-Hill Companies, Pearson Plc and Oxford University Press. It has offices in the US and the UK, besides India.

E-learning came into prominence when in April 2008 the entire 35% stake of UTI Ventures in Mysore-based e-learning solutions provider Excelsoft Technologies Pvt. Ltd was purchased by private equity fund DE Shaw and Co. Lp for $31 million.

UTI Ventures had in 2001 invested about $600,000 in Excelsoft Technologies Pvt. Ltd. In September last year, Excelsoft raised about $10 million by diluting 10% stake to Singapore-based Arohi Asset Management Pte Ltd.

Recently, Tutorvista, another education company, raised $19 million in its third round of funding from Pearson and existing investors Lightspeed Venture Partners and Manipal Education and Medical Group. TutorVista provides online tuitions to students in markets such as the US and the UK, besides India, while it also provides curriculum support and technology solutions to schools in India.

Some other companies funded by private equity companies include Hurix Systems Pvt. Ltd, backed by Helion Venture Partners Llc., and Brainvisa Technologies Pvt. Ltd, backed by Sequoia Capital India Advisors Pvt. Ltd.

The US and India-based e-publishing firm PreMedia Global USA Inc. is also entering the e-learning segment. The company raised $18 million from JM Financial India Fund, a joint venture between JM Financial Ltd and Old Lane Fund, which is owned by Citigroup Inc., in January 2008.

Some interesting questions

1. You said that your goal is to beat the stock market by 5-8%. How did you arrive at this lower and higher end ? And why is that important ?

The market on an average has given 13-14% per annum over the long term, maybe even more. In case of most of the value investors - ones with public record- i have seen an outperformance of around 2-3%. The greatest of them all - warren buffett beat the market by around 13%. So i have taken a goal which is not as ambititous as buffett, but more ambititous than the average. Also as i do this part time, i dont think it would be easy for me to exceed 8% above market - which translates to around 20-23% per annum over the long run (5+ years).

The above goal is important, for the reason that the time and effort should justify the rewards. i can easily match the index or maybe beat it by 1-2% via index or mutual funds. So i should cross the high water mark of 1-2% to justify this effort, else i am better off investing in index and mutual funds - which i do now too. I have been lucky to have exceeded my goal till date.

2. You also mentioned that you wanted to beat the stock market on 3 year rolling cycle. How did you arrive at that number ? And what is the significance of this number ?

The reason of having a 3 yr rolling period is that a yearly or lesser number is too short to confirm if i am beating the market or not. Over 1 year or less, luck plays an important role and one cannot be sure if the performance is due to skill. However as the time period increases, the element of luck reduces and skill plays a bigger role in the returns. The reason for keeping it 3 years is that it long enough to eliminate substantial a component of luck, but not so long that i dont get feedback for a long time on whether i am truly beating the market or not.

There are ofcourse no hard and fast rules on the above parameters and i have set them to my own specific case.

3. I am assuming that you are publishing your whole portfolio and your thought process in your blog. What are the chances of someone coat-tailing? What are your chances of seeing some competition and see a rise in the share price because of your publication ? Either you will share forever or there may be a time when you will have to stop revealing a lot (because of competition or lack of time to blog)

I have no issues people coat tailing me, although i dont think that is a problem yet. i am not yet so famous or considered a super investor that people will blindly follow me. in addition, my picks usually have a bad short term outlook.

So it is unlikely someone will just buy what i discuss and see immediate benefit.My approach on the blog is to share my learnings and analysis, but i dont give tips. So an individual is left to make his decision, which is not easy if you are just following someone blindly. Also considering i am small investor and followed by others like me, it is very unlikely that any stock i discuss will have a price run up after i discuss about it. if that starts happening ..then i have arrived in life :).

On continuing to share my ideas i dont know how long this will continue. i dont see it stopping in the next couple of years ..however i do have plans to start private investment partnerships. When i do so, i will have look at the constraints such an arrangement will have. However that is still a few years away.

Small-cap stocks: Outperformers then, underperformers now

In the rally after elections, small-cap stocks were in news for outperforming the broader market. Yet again they are in news – this time for underperformance.

The BSE Small-Cap index managed nearly twice the Sensex gains in the period from May 15 (the day just prior to election results) to June 4, the recent high for this index at 6,525.

The index was up 52 per cent over this period and in fact peaked out before the Sensex did.

The Sensex touched its recent high on June 10.

Top movers in the small-cap basket post-election were mainly the stocks of realty players such as Sobha Developers (up 122 per cent), Marg (up 116 per cent), Unity Infra Projects (up 110 per cent) and Kolte Patil Developers (up 105 per cent).

Mid-caps

In the mid-cap space too, the ones that led from the front were the infrastructure and realty players – Gammon Infra Projects, Simplex Infrastructure and Puravankara Projects.

However, the BSE Small-Cap index has also been quick to correct in the post-Budget meltdown.

In the four sessions after the Budget, the index has lost 18 per cent, plunging much more than the Sensex, which has declined 11 per cent.

While the index stocks have undoubtedly seen “basket selling”, it is not clear why small-caps have followed suit, as retail investors have indulged in sporadic buying in recent trading sessions. The stocks that have fallen the most this week are not the top gainers after the elections, though these counters weren’t spared of deep cuts.

Losers

From their prices on June 4, Sobha Developers has lost 19 per cent, MARG is down 28 per cent, Kolte Patil Developers is down 41 per cent, Gammon Infra Projects shed 12 per cent, Simple Infrastructure lost 14 per cent and Puravankara Projects discarded 37 per cent.

India is the bright spot

When it comes to investing, the key is to understand investor behaviour. And in recent times, the fear of uncertainty is preventing most high net worth individuals (HNIs) to make the best use of this opportunity, says a recent survey done by Barclays Wealth along with the Economist Intelligence Unit. The survey of 2,100 affluent investors indicated that when it comes to the fear of investing Indians are no different from the rest of the world.

Among Indians, while 80 per cent see this opportunity, only 16 per cent are willing to take more risk. Says Satya Bansal, Chief Executive, Barclays Wealth India: “There’s a clear dichotomy between investors’ belief and action.”

As the survey was conducted in April and May 2009, many of the 115 HNIs responded before the central government elections. Overseas investors are more bullish about India’s growth than Indians themselves.

About 45 per cent investors in the UK, 25.2 per cent the US and 28 per cent Chinese investors are confident on India as compared to 22 per cent Indian HNIs. Says Bansal: “It’s the overseas investors’ confidence in India combined with ample liquidity and low global interest rates that will drive FDI and FII investments in India.”

—Clifford Alvares

IT Services: A quiet quarter

With the environment still challenging, IT firms are likely to turn in a muted set of results for the June 2009 quarter; volumes are expected to come down sequentially with no uptick in pricing. The accompanying commentary will almost certainly be cautious given that the order pipeline is more or less flat, customers are taking their time to close deals and also because clients continue to expect further cuts in pricing.

However, the market is in a better situation than six months back with projects being renewed. The TCS management is believed to have indicated, a couple of weeks back, that dollar revenues could start picking up and show a sequential growth as early as in the second half of the year. That’s encouraging because TCS has posted dollar revenue declines in three of the last four quarters despite adding clients mainly due to pricing pressures and key Wall Street clients ramping down business.

However, as of now, the rupee has appreciated during the quarter though the June quarter numbers may not reflect the entire damage thanks to cross-currency movements (the dollar has depreciated against the euro and the pound). On the whole, therefore, revenues for the top-tier players shouldn’t come off by more than 2 per cent sequentially. Infosys’ operating margins, which were a strong 33.6 per cent in the March quarter, may slide somewhat.

Expectations of a turnaround in the marketplace in the next few months seem misplaced —it's unlikely any company will alter its guidance meaningfully. Since the June quarter will see weak revenues, vendors will need to grow revenues by 2-5 per cent in the next three quarters to maintain last year's numbers.

Given this, IT stocks are unlikely to trade at higher valuations in the near term. At Rs 1,706, Infosys trades at 17.4 times its estimated 2009-10 earnings, while at Rs 380, TCS trades at 14 times. The abolition of the fringe benefit tax will help IT companies’ earnings in the current year, but not too significantly.