| Will the Techs rise again? |
The gloomy revenue and earnings outlook by Infosys Technologies
knocked the bottom of the stock markets. The markets were waiting with bated breath for
Infosys Technologies to lead them out of the bottom of the market cycle. Instead, Infosys
delivered the markets a body blow from which it may find it difficult to recover at least
for some time to come.
The much awaited dynamic duo - Infosys and Satyam’s results were as expected but then
again not quite as expected. What alarmed the investors was the growth projections for the
coming quarters which showed that definitely the US slowdown has impacted the big two in
India. For sometime now the stock prices of the IT sector companies have been on a
downtrend for a variety of factors. The slowdown in the US economy is expected to have
real growth rates close to zero. Anticipated cuts in technology spending and the increased
staff costs, i.e the cost of having a larger bench, may tell on the “soft” ware
bottomlines.
What really pulled Infosys down was the sharp drop in revenue and earnings outlook
projected for the first quarter ending June 30, 2001 and for the financial year 2001-02.
In the first quarter ended June 30, 2001, the company expects the total income to be
between Rs 580 crore and Rs 590 crore and per share earnings in the Rs 27 - Rs 28 range.
This translates into a 1.5 to 3 per cent revenue growth and flat growth rate in per share
earnings, quarter-on-quarter. For the financial year 2001-02, Infosys has indicated that
its total income is expected to be between Rs 2,500 crore and Rs 2,560 crore and the per
share earnings between Rs 118 and Rs 121. This works out to mere 30 per cent revenue
growth and per share earnings growth of 24-27 per cent.
This gloomy revenue outlook projected by Infosys Technologies for the first quarter ended
June 2001 and for the financial year 2001-02 appears to have taken the markets by
surprise. The revenue outlook of Infosys lends credence to the view that the software
industry may also be affected by cyclical trends, though it remains to be seen whether
this cyclical impact is only a short-term phenomenon. Indian software companies may feel
the pressure of the slowdown over the next couple of quarters, depending on how the
slowdown intensifies in the US.
It has been established that in a slowdown, most companies are caught up in making
difficult decisions such as layoffs and putting a squeeze on operational expenses. At
these times, generally outsourcing decisions are put on the backburner and taken up one
after the slowdown reaches a steady state. The US companies are also expected to react in
this fashion. Given the project execution expertise and competitive cost advantages
enjoyed by Indian software companies, the outsourcing opportunities will accrue, but only
after a time lag. But this lag effect may have an adverse impact on the near term
performance of the industry as a whole.
So, when will the Techies rise again?
As of now, after the huge fall in stocks across-the-board, there seem to be no clear
indications about when there will be a change in sentiment. The turnover in all the
technology stocks has also dropped sharply. Technically Infosys is headed for - on the
upside, the Rs 3,650 - 3,750 range and on the lower side - towards the Rs 1,500 - 1,800
zone. Similar to Infosys, the trend in Satyam too appears distinctly negative. In the best
case scenario, the scrip could be in the range of Rs 214 - 140
The price earning (P/E) ratio of the technology scrips has been falling like nine pins.
Analysts expect that the market is preparing for a further fall in P/E for these stocks in
the coming weeks till the end of May. Common opinion is that the IT companies, which have
a strong presence in the US, are likely to see a substantial drop in their export earnings
and profit for at least the next two quarters. Estimates of an average P/E of about 20 for
the front-ranking new economy scrips such as Infosys, Wipro and Hughes Software is what is
being predicted. These very same scrips commanded an average P/E of around 40 in February
and currently have P/E of around 25. For the second level tech shares, such as Pentamedia
Graphics, Satyam Computers and HCL Technologies, a P/E of around 10, as against the
current 20, and the third tier tech stocks such as DSQ Software, Silverline and Rolta have
already settled at a P/E of less than five. Early signals from the Nasdaq will be crucial
for pricing of tech stocks in the domestic market. The recovery of the domestic market
this time round is likely to be long-drawn, but steady. So, for the time being, techies
will be best avoided, they have some downside left and then investors can take a long term
view and enter them.
Aru Srivastava
Feedback Rate this article