Satyam Computer Services Ltd has done much better than its larger peers in terms of share price performance in the current bull run. Since August 24, 2004, when Tata Consultancy Services Ltd listed, Satyam has risen by as much as 188%, higher than Infosys Technologies Ltd’s return of 157% and TCS’ return of 135%. Wipro Technologies Ltd disappointed with a return of just 84%. Since April 2003, when the current rally began, Satyam shares have gained 462%, much higher than Infosys’ return of 288% and Wipro’s gain of 148%.
It’s not that Satyam has been favoured over its larger peers throughout this period. In fact, it had underperformed Infosys by a large margin both in financial year 2004-05 and in 2006-07. But it more than made up for those lacklustre periods by substantial outperformance in the other two years, i.e. FY04 and FY06. In FY06, Satyam’s earnings had grown by about 36%, faster than its peers, which led to the outperformance.
Besides, so far this fiscal, Satyam has given positive returns of about 4%, at a time when its peers have fallen between 2% and 7%. The story now is that Satyam has a greater chance of meeting its guidance target, which is based on a rate of Rs42.3 a dollar, against Infosys’ target which is based on a rate of Rs43.1. Furthermore, Satyam has a higher proportion of its receivables hedged, which means the near-term impact of rupee appreciation would be the lowest. Finally, Satyam’s wage hikes are effective October, unlike most of its peers who give hikes in April. Thus, its results for the two quarters till September are set to look much better.
But all of these factors are short-term in nature. The long-term impact of the rupee is the same for all players—the benefit of hedging wears off after the derivatives contracts expire, and one would have to face the fact of working on lower margins compared to, say, when the rupee was at Rs44 to a dollar.
Keeping that in mind, does it make sense for the Satyam stock to continue outperforming its peers? Satyam’s discount to Infosys (based on the forward price-earnings ratio) has narrowed considerably, from 37% three years ago to 22% currently. Thankfully for Satyam, some other factors have fallen in place as well. In the past three financial years, its growth has been consistent between 36% and 41%. The outlook on growth, too, seems to be better than a few years ago. At least part of its outperformance seems justified.
ICICI Bank Ltd’s decision to reduce interest rates for the first time in two years is the latest indication of a reversal in the interest rate outlook. Call money rates are close to zero, while the yield on the 10-year government security fell below 8% for the first time since April on Thursday. Deposit rates have fallen and banks have slashed their bulk deposit rates. That banks are flush with funds is clearly brought out by their incremental credit-deposit ratio, which was as low as 15.6% in the month to 22 June. Seen from another perspective, the amount of surplus (deposit growth minus credit growth) with banks has been growing. This surplus was Rs39,493 crore in the month to April 27, fell to Rs11,585 crore in the month to 25 May and moved up to Rs50,241 crore in the month to 22 June. The reason behind the fall in interest rates is therefore abundantly clear. The feeble rise in credit during the last month has been more than offset by a huge rise in deposits.
What’s the source of this increase in deposits? Money supply growth is rising at a year-on-year rate of 21.7%, compared to a growth of 18% in the year-ago period.
One reason for the growth is RBI’s renewed intervention in the forex markets, seen from the rise of $8.5 billion in reserves between 25 May and 29 June, after a long period during which the reserves remained at more or less the same level.
With inflation curbed, RBI now has more leeway to intervene in the forex market.
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