As IT stocks hit
the ceiling, the question racking investors is: will the boom last?
The stock markets were in dol-drums till suddenly the sensex started
surging frantically, first across the 3,000 mark and now, while the
Footsie and Dow Jones dip steadily, the sensex is teasing the 3,500
mark. The bourses are back in business and the primary and secondary
markets show signs of renewed vitality. The surge is lead by FMCGs and
IT companies. But, while the FMCG contribution comes from company-specific
majors such as HLL, Colgate Palmolive and Nestle, among others, IT as
an industry has come to be synonymously associated with dizzy growth.
Incredibly, a large number of small infotech companies tapped the upper
end of their circuit breakers (8%). In the first week of February itself,
Digital Equipment appreciated from Rs170.30 to Rs285.90 in 10 days,
a 67% jump. Similarly, Silverline jumped from Rs145.20 to Rs194.80 in
the same period and so did Onward Technology, from Rs185.50 to Rs253.20.
Scrips like that of RS Software, BFL Software, HCL Software and DSQ
Software have appreciated by more than 1,000% in the last 52 weeks.
HCL Computers actually grew by a whopping 2,074%, followed by BFL Software's
incredible 1,754% appreciation (the adjectives are unavoidable) in the
last 52 weeks.
In a span of eight trading sessions, IT stocks have gone up by 35% and
that too by high volumes. Little surprise then that droves of investors,
big or small, have been making a beeline for IT stocks. While FIs and
FIIs have been dipping into the main IT counters such as NIIT, Infosys,
Satyam and Pentafour Software, small investors have been angling for
the plethora of small-time companies steadily posting high returns.
The spin-offs too have been eye-catching. The corpus of Kothari Pioneer
Infotech Fund, the only mutual fund scheme investing solely in IT companies,
has touched Rs30 crore. It has turned in a return of 63% since August,
when it was set up, and its Net Asset Value (NAV) quoted at more than
Rs16. Observes BK Gupta, Market Analyst with Kothari Pioneer, "There
is no question of a downtrend in the near future. We expect a sustained
growth of 50-60%. The NAV should peak up to Rs21."
The Nasdaq Stock Market too has been eyeing Indian software firms seeking
to list themselves in the US markets. Baring Private Equity Partners
(India) Ltd intends to make further investments of about $150 million
in IT stocks.
Will the dream run last
Typically, at this point, the question exercising the mind of every
investor is, will this boom last. What are the long-term implications,
will the good times roll or are IT stocks a passing fancy? Going by
the records in the last two years, IT companies, by and large, have
posted mindboggling returns. After a 50%-plus growth in sales and profits
during 1997-98, in the last three quarters, software companies' sales
rose by 50% and their bottomline rose 70% plus. And this too in a market
which even optimists regard as recessive, in which commodities and the
manufacturing sector are stuck in a seemingly unending hiatus.
The Q3 results of most companies only bolster this trend. Wipro's software
business grew by 65% during the three quarters, registering a gross
revenue of Rs435.9 crore. Aptech's net surged by 63.53%. Tata Infotech
posted a turnover of Rs89 crore. In this sense, much of the popularity
of the stocks is driven by sound fundamentals. However, Jinesh Jain,
Broker, National Stock Exchange disagrees, "The fundamentals are
good but the prices don't reflect the true worth of the scrips. At this
point they are driven by speculation in the over-heated market."
The market capitalisation of Indian IT companies has crossed Rs1,00,000
crore, which is 10% of the total market cap. "Yes that is true,"
agrees Ashwani Goyal, Broker, NSE and DSE, "But the scrips of only
a few companies reflect true value, the rest have no fundamentals to
justify the prices." Perhaps, the euphoria in the bourses outdoes
what the fundamentals justify. Much of the Indian software industry,
of course, is driven by Y2K. Take Tata Infotech, for example. Its software
business grew by 65% during the three quarters, registering a gross
revenue of Rs435.9 crore. But, 40% of its exports is Y2K-related, accounting
for a fourth of the turnover. About 70 of the total exports turnover
is attributable to Unisys subcontracts, accounting for 46% of its turnover.
Though the company intends to shift its focus, a substantial chunk of
its turnover is likely to be severely afflicted at the end of the year.
Also, some of the spurt in prices is prompted by FII fancy, for the
lack of anything else to invest in. This sets a chain reaction resulting
in local operators and institutions following the leader. But, this
could very well be reversed in as facile a way, especially because globally
the markets have been fascinated with internet stocks, and they are
yet to take-off in India. An economic revival may also mean a diversion
of funds from infotech.
Of late, some companies have re-christened themselves to appear to be
IT companies and the investor will have to be doubly careful to separate
the chaff from the grain. Managements may also be tempted to download
shares when they have more than is necessary for control, some of the
smaller fry-not doing so well but currently enjoying a high capitalization-may
be tempted to sell out. But the boom provides companies with a boost.
Most are dependent on the capital markets for funds. While Silicon Valley
thrived on stock options and venture capital, today IT companies can
offer stock options and retain invaluable trained personnel crucial
to the health of such companies.
Call it a technical correction or a leveling out of an overheated market
but, in the short run, there might be see-saw movements. But eventually,
the gradual shift of the global economy toward knowledge-based products
assures these scrips a future. There is no sense of deja vu here. The
enthusiasm for a young industry lacks a precedent. There is no guessing
at which point it will bottom out. But the market dynamics will prevail,
the industry may loose its blanket sanction from investors, but company-wise
performance will dictate demand for their scrips. IT or not, companies
that deliver will attract, companies that don't will not.
DIPANKAR DAS,
in New Delhi.
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