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Global cues to set IT stocks path

Global cues to set IT stocks path
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First Published: Thu, Jan 10 2008. 12 02 AM IST

Updated: Thu, Jan 10 2008. 12 02 AM IST
Mid-sized information technology (IT) companies Mastek Ltd and iGate Global Solutions Ltd reported decent results for the quarter ended December and also reassured investors that they aren’t seeing any slowdown yet in the US market.NSE’s CNX IT index gained 0.5% as a result, on a day the markets declined marginally.
Phaneesh Murthy, CEO, iGate Global Solutions, said: “Visibility of revenues is getting better and we are looking at another good sequential quarter.” Nearly 78% of the company’s business is from US clients. Mastek gets a much lower proportion of its business (25%) from the US and has no exposure to the banking industry, but even then the fact its US business grew 50% in dollar terms is heartening.
But before coming to the conclusion that the worry about the slowdown in the US is overdone, consider the movement of the tech-heavy Nasdaq Composite lately.
The index has lost more than 10% in the eight trading sessions since 26 December on worries that tech spending will be hit in the US. The good news for IT stocks is that they haven’t had the customary run-up in prices just prior to the results season. On the contrary, they have declined and at current prices, the negatives are factored in to a large extent.
Meanwhile, Indian software companies are likely to be vague about how 2008 will shape up. Their annual guidance is also due only in April. Thus, investors would do well to track results of global tech majors as well. Like Edelweiss Securities Pvt. Ltd said in a results preview note: “Global cues are likely to be much more powerful than local cues in setting stock direction (of IT firms).”
Mastek’s buyback
The Mastek stock has outperformed the CNX IT index by more than 20% since early December, which is surprising since the rupee has been appreciating against the pound lately, although it has been flat vis-à-vis the dollar. Mastek gets 68% of its revenues from Europe and would be among the worst affected because of the pound’s depreciation.
According to analysts, the rise in its share price is thanks to the company’s plans to buy back shares as well as raise funds through a foreign currency convertible bond (FCCB) issue to fund its planned acquisitions overseas. The company has set aside Rs65 crore for the buyback and plans to raise $20 million (Rs79 crore) through the FCCB issue.
One would imagine it’s much easier to use the internal accruals for the acquisitions, rather than spend management effort in two extra transactions (the buyback and the FCCB issue).
In any case, buybacks are traditionally used to return excess cash to shareholders and improve the company’s return ratios. According to Sudhakar Ram, chairman and managing director of Mastek, his company’s shares are undervalued, which the buyback would help address. Going by the share price movement lately, the strategy has certainly worked.
Axis Bank shines
Axis Bank Ltd’s December quarter results beat market expectations, sending its share price up 2.8% on Wednesday. The results were excellent, with operating profit rising 101%, compared with the year-ago period, while net profit went up 66%. Earnings per share went up by 41.6% year-on-year (y-o-y), despite a huge equity issue in the interim.
The bank’s advances went up 50%, far above industry growth. Net interest margins were at 3.91%, compared with 3.28% in the September quarter, thanks to a significantly lower cost of funds. A higher proportion of low-cost current and savings account deposits helped lower the cost of funds. The rise in lending volumes as well as the higher margins led to a 91% rise in net interest income, compared with the year-ago period. (In the September quarter, the y-o-y rise in net interest income was a much lower 61%). Add to that an 81% rise in fee income and the stage was set for the big jump in profits.
The icing on the cake is that the growth has been accompanied by a decline in non-performing assets (NPAs) both in absolute terms as well as a percentage of customer assets. Net NPAs were a low 0.42% at the end of December 2007, compared with 0.55% at the end of September.
The only metric on which the bank has slipped is return on equity, which is down to 14.81% in the December 2007 quarter, compared with the year-ago period, because of the dilution in equity. But even that metric has improved from the 13.64% notched up in the September quarter.
What’s more, the bank is in the process of transforming itself from a plain vanilla lender to a financial supermarket, on the lines of its peers. Small wonder that, in spite of its elevated valuations, the stock has comfortably outperformed the BSE Bankex lately.
Write to us at marktomarket@livemint.com
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First Published: Thu, Jan 10 2008. 12 02 AM IST