Infosys, Satyam and Wipro are the companies, which had led the market charge in the recent past. What then went wrong? Is it that the old economy / new economy divergence was more a myth than a fact? In our budget broadcast, we had underscored the fact that the Union Budget was the most market-unfriendly in recent memory. That is proving to be absolutely true. But the real blow came on April 4^th, 2000 when the sensex lost 361 points in a single day, a record of sorts. All the IT stocks lost heavily. Pentafour Software that was quoting at Rs 1813.05 on 6th March 2000 came down by 50% to Rs 900.40. Satyam Computers fell by 50% from Rs 6828 to Rs 3448.65 and Digital Equipment also fell by 50%, from Rs 1213.9 to Rs 616.00. Infosys was another major loser by 35% while Wipro lost 32% in the same period. And the software woe list could go on endlessly.

In retrospect, since the presentation of the budget, the sensex has been moving in a secular downtrend. The problem with the union budget was not that it was disappointing, but the fact that expectations were running too high. But the real reasons for the crash in the sensex were far beyond the budget.

With the IT fever catching on, the Nasdaq has come into play. Once again the saying, when US sneezes the rest of the world catches cold has been proved. The recent bear run in Nasdaq stocks, which are predominantly tech stocks, is a major contributor to the downturn. And a recent rumour of withdrawal of DTAA for FIIs operating from Mauritius has helped little. The budget which had announced an additional tax of 12%(including the surcharge) on dividends and phasing out of concessions to software exports were major contributors to the downtrend.

Apart from the above mentioned technical issues there are a host of real issues which will ensure that markets are unlikely to reach those stratospheric heights in the near future. First and foremost the market was heating up and a correction was long overdue. Atrocious P/E ratios for tech scrips at beyond 150 were well nigh unsustainable. The correction had to happen sooner or later. Secondly, the IPO effect has rubbed off on the secondary markets. With oversubscriptions falling drastically and most IPOs moving south after an encouraging initial listing, the thrust that spurred the markets seems to be missing. This psychology has spurred both individual and institutional investors to book profits which has been aggravated by the herd mentality. On a particular day, it was noticed that Mutual Funds have gone for spot sales of Rs.800-1000 crore to fund the redemption pressures. Additionally, due to the hike in divided tax, many companies declared interim dividends and hence tried to create some liquid cash for which companies had to sell their investments in shares.

However, there are few companies which had benefited in the recent past. Bajaj Auto, which was Rs 279.70 on 6^th March 2000, has increased by over 30% to Rs 366.50. CIPLA, which was quoting at Rs 928.20 increased by 26% to Rs.1169.95 on 5^th April 2000. Cadbury increased by 25% to Rs 896.95 and Britannia by 24% to Rs 579.45 during the same period. So does it mean it is the return of the old economy stocks and the end of the IT mania?

Not really if one looks at the performance of Sterlite which gained the moment it hived off its convergence business in a process of value discovery. The divergence between the old and new economy continues to be relevant, but asinine valuations are passe. The fact is that investors are becoming increasingly selective. The brief days of IT mania are over. Huge oversubscriptions and High P/E valuations are going to become a thing of the past for the IT sector. For the discerning investor this provides an opportunity to enter the market at more reasonable valuations. For the naïve investor, well he stands a better chance of getting an IT IPO allotment.