Play It Safe

The herd run is over and reality is beckoning investors. The

market had a short bull burst in the last quarter of financial 1999-2000, ending

March, followed by a mayhem in the next two months. During this period, the

Sensex touched a high of 5,933 points before falling to current levels. The

euphoria has vanished and pessimism has set in. It is time to look at the

winners–if there are any–and the losers in the last six months of high

adrenaline stock market activities.

The highs and lows

We analyzed data on IT stocks–43 in all–for the last six

months to remove daily fluctuations and get a better picture. The Sensex lost

about 5% since the beginning of December 1999 till the end of April 2000.

Barring a few, majority of the highly favored IT stocks met with a similar fate.

Again, if one considers the stock prices during February and March, the

percentage losses would be far greater for almost all IT stocks. In group A,

market leaders Wipro and Infosys returned positive figures. Both these companies

had split their shares to bring in more liquidity in their shares and managed to

create more wealth for shareholders.

The other three companies that had plus scores were SSI,

Satyam and Aptech. All the other companies in this group, including NIIT and HCL

Infosystems, would have given negative returns if investors had bought the

stocks in December 1999 and held on to them. In group B1, DSQ software and

Hughes Software came tops while SQL Star and KLG Systel were bottom of the heap.

Gains and losses in market cap could give another good idea

of the overall winners and losers. Since December 1999, market cap of group A

shares of which data was analyzed, has increased by a whopping Rs58,594 crore.

The growth has been again fueled primarily by Wipro and Infosys, which saw their

market caps swell by Rs37,000 crore and Rs21,400 crore, respectively. Scrips in

group B1 saw market cap moving up by Rs17,800 crore. Excluding HCL Technologies,

this would have seen an erosion of 8% since last December.

Group B scrips have been battered the most. The market cap in

the group has been eroded by over 34% in the past six months to touch Rs214

crore by end of April 2000. Again we have not included new companies like

Geometric Software and Melstar Infotech as they have been listed only recently.

Also, software issues have been the flavor of the market,

with most of these being oversubscribed by many times. They have been listed at

bourses much above their issue prices. And such prices have sustained over a

period of time. For example, in late 1999, Geometric Software entered the

market, offering its shares at Rs300 per share. The share listed at much above

its issue price and touched an all-time high of Rs997. It has since settled at

its current level of around Rs600. Polaris Software has a similar story. Its

public issue was priced around Rs220. After listing, the stock post touched an

all-time high of Rs3,225 before settling at around Rs1,100-1,300.

The last quarter of fiscal 1999-2000 saw a spate of

companies, usually with software or technology tag added to their names,

applying for their initial public offerings. As per estimates, around 100 IT

companies are expected to raise Rs5,000 crore from the market in the current

financial year. Quite a few have already applied to SEBI for vetting–a

necessary process before hitting the market.

Taking advantage of the huge demand for IT stocks, a large

number of companies with little exposure to IT, but which still call themselves

IT companies, are out to make the proverbial hay while the sun is shining. A

good example is of a company called Frontlinesoft. Its core business has been

construction but it tells the market it has IT capability. Another example is

Jeevan Softech. The promoters of Jeevan Softech have an interest in the finance

segment with Jeevan Mitra Chit Fund and Jeevan Mitra Finance Corp. They plan to

raise about Rs1.50 crore for their newfound IT affiliation.

Moreover, the kind of money companies are trying to raise

also creates doubts about the objectives behind the issue. A majority of the

companies are planning to raise about Rs1.5 to Rs3 crore, an amount easily

available from banks considering the rosy projections most of the companies are

making. There are concerns that the current trend has parallels to the one in

1992 when many finance companies entered the primary market. A majority

disappeared after their initial public offerings–collecting huge sums on the

market.

Mutual funds lose

Not only are non-IT companies trying to make money through IT

forays in the market, but established IT companies are also raking in the moolah

by encashing on the high prices of their stocks. A few IT companies followed the

private placement route, choosing to offer rights or preference issues. They

made money at the cost of mutual funds that picked up these shares at high

valuations. Ramco Systems in one such company. It placed its shares with funds

like SBI Mutual Fund and UTI at Rs3,480 per share. Its current price is Rs1,800.

The same is the case with Pentasoft Technologies, which was priced at around

Rs800 per share when it offered shares to Reliance Mutual Fund, Sun F&C and

Birla Mutual Fund among others. Its current price is about Rs580.

Mutual funds these days are keeping a low key on the

publicity front. Since IT has been the rage during the first four months of the

year, a majority of emerging funds were targeted at the technology segment.

Also, mutual funds with high IT exposure were touting their successful

investment strategy with the ever increasing daily net asset value (NAV).

However, now the enthusiasm is all but over. Not many funds are advertising

their stellar performance and inviting money on the basis of their IT

investments. The next bull run will again break the lull and the story will

repeat.

Lessons

We still have Wipro and Infosys making a lot of their

shareholders richer than they were six months ago. The analysis showed that

investing in fundamentally sound companies could still pay rich dividends. This

has become important for retail investors who lack the sophistication and tools

of large investors.

YOGRAJ VARMA