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Indian IT underperforms peers

Indian IT underperforms peers
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First Published: Tue, Apr 15 2008. 12 08 AM IST

Updated: Tue, Apr 15 2008. 12 08 AM IST
With the spotlight firmly on information technology flagship Infosys Technologies Ltd’s results and its forecast for the year, it’s time to take a look at how the shares of Indian IT services companies have performed relative to software firms abroad.
The Bombay Stock Exchange’s BSE IT index has done better than the Sensex in 2008, falling 19% when the Sensex has lost 22%. That’s partly due to the disastrous performance of IT stocks last year, when it lost ground rapidly on account of the runaway rupee. Because of that the IT shares declined from a lower level compared with the main index this year. Compared with the year-ago period, the BSE IT index is down 25%, while the Sensex is 20% higher than where it was. That IT stocks have done better than the benchmark index in 2008 is, therefore, no reason to cheer. As for Infosys, its stock has mirrored the 19% drop in the BSE IT index in 2008, but it’s down 29% from a year ago.
The big hope for the industry is that a slowdown in the US may actually lead to more demand for outsourcing, thereby cushioning the impact of a slowdown in IT spending on Indian software services companies. But the performance of Indian IT stocks seems to indicate that investors don’t really have much faith in that theory. While the MSCI Barra World index of IT services has declined 10% year to date (till 11 April), the Emerging Market (EM) index of IT services is down 16%. That’s a smaller decline than the fall in the BSE IT index. Compared with a year ago, the MSCI EM index of IT services is down 23%, almost as much as the drop in the BSE IT index. Once again, the World IT Services index, which is lower by 15% compared with a year ago, has done better.
What’s more, IT services stocks in emerging markets have done much worse than the broad market — while the MSCI EM index is down 8% in 2008 (till 11 April), the EM software services index has done much worse.
Clearly, investors are pricing in worst-case scenarios for Indian and emerging market IT services companies. That will limit the downside.
Steel stocks may continue to face pressure
Investors in Indian steel companies, already disenchanted by the pressure from the government to hold price increases and in some cases even cut prices, are now faced with the likelihood of a flattening of global steel prices. Posco, the world’s fourth largest steel maker, announced better-than-expected results for the January-March quarter, and even raised its 2008 sales target by 17% to reflect the price hikes it has taken this year. But, despite that, it kept its operating profit target unchanged, indicating that its price hikes may not make up for the huge jump in costs of inputs such as coal and iron ore. Posco’s shares fell by 6.5% and even other Asian steel stocks also declined by 5-6% as a result.
The assumption thus far has been that rising costs can be passed on by steel companies to their clients, thanks in part to a shortfall in supply in the global steel market. But with a large player such as Posco indicating that price hikes would not be enough to counter higher input costs, the outlook now looks bleak. Posco’s revised outlook puts its profit margin at about 17% for the year, down from over 20% based on the original guidance.
Players with captive iron ore and/or coal mines such as Tata Steel Ltd and Steel Authority of India Ltd (SAIL) are well placed, as far as their Indian operations go. But non-integrated players such as JSW Steel Ltd are bound to face margin pressure. And not that the others will go unharmed. While SAIL has captive iron ore mines, it imports much of its coal requirements, which will hit margins. Most of Tata Steel’s revenues come from Corus, which is likely to face severe margin pressure if it’s not able to pass on input cost increases freely to its clients.
Posco’s revised outlook suggests that raising prices commensurately is not a given. Pressure from the government, fighting record inflation levels, is making things only worse. The recent underperformance of steel stocks may continue.
Write to us at marktomarket@livemint.com
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First Published: Tue, Apr 15 2008. 12 08 AM IST