Mumbai: The Satyam Computer Services Ltd scandal may scare away institutional investors, especially those new to the Indian market, and lead to new corporate scrutiny standards, say fund managers and analysts. They are, however, not ready to downgrade the information technology (IT) sector and some of them say that other IT companies may actually benefit from Satyam’s fall.
“Outsourcing as a segment will continue. It is a mature industry,” said Sandeep Sabharwal, chief investment officer at JM Financial Asset Management Pvt. Ltd. “The others (bigger companies such as Infosys Technologies Ltd, Wipro Ltd and Tata Consultancy Services Ltd) will actually benefit.”
Shares of Infosys gained 1.67% on Wednesday to close at Rs1,187.10 on the Bombay Stock Exchange (BSE) and those of Wipro gained 0.23% to end at Rs243.30 each.
Analysts said that customers of Satyam would have no other choice but to take their work to some other Indian firm due to lack of comparable cost structures elsewhere.
After its chairman B. Ramalinga Raju confessed to inflating the company’s revenue and profits, the Satyam scrip fell 77.7% to Rs39.95, its lowest in a decade. Fears about Indian corporate governance standards sparked off declines in several other stocks and the Sensex, India’s benchmark equity index, closed 7.3% down at 9,586.88 on Wednesday.
“One has to be really worried about what the implications for India are,” said Anoop Bhaskar, who heads equity investments at UTI Asset Management Co. Ltd, India’s third largest mutual fund with Rs42,548 crore worth of assets under management in December. “For anyone who is new to India and has not invested in the country before, India will become a no no.”
UTI Mutual Fund held close to 1% of Satyam stock until recently, but has since sold these shares.
The Satyam episode comes at a time when foreign institutional investors (FIIs) have turned off India and other emerging markets in the wake of a global credit crunch. Analysts, however, say that the Satyam incident will not add to their aversion to India.
In 2008, FIIs pulled out some $13.5 billion (Rs65,610 crore today) from Indian stocks (after accounting for purchases), recording the first net outflow in 11 years. The Sensex fell at least 50% in 2008.
The Satyam incident “will have an impact on the perception about corporate governance levels in India”, said Sukumar Rajah, chief investment officer (equity) at FII Franklin Templeton Investments, India, in an emailed statement.
“Such incidents have led to strengthening of the regulatory framework and we could see the same happening in India. This unfortunate development will be a short-term negative for market sentiment. However, further tightening of regulations and oversight mechanism for auditors emanating out of this incident should be a long-term positive for India,” he added.
“The impact (of the fraud) will be manifold,” said Satish Ramanathan, head of equities at Sundaram BNP Paribas Asset Management Co., which held at least five million shares of Satyam before Raju’s confession. “This is the beginning of new corporate scrutiny standards.”
Still, fund managers noted that this was likely to be considered as a one-off event and not lead to a de-rating of Indian stocks.
“It is unlikely to happen in India... It is too far big and important a market,” said Bhaskar of UTI Mutual Fund. “Existing players will (still) be willing to pay higher premium on quality stocks.”