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Cognizant the right bellwether?

Cognizant the right bellwether?
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First Published: Sat, Feb 09 2008. 01 24 AM IST
Updated: Sat, Feb 16 2008. 04 18 PM IST
Cognizant Technology Solutions Corp.’s shares rose 13% in after-hours trading, after the company reported better than expected results for the December quarter. The company also announced that it expects a strong 38% growth in revenues for the year until December 2008.
Software stocks listed in India also gained, albeit at a lower rate—the National Stock Exchange’s CNX IT (information technology) index rose 3% on Friday. Note that Cognizant’s growth rates have consistently been higher than those of peers such as Infosys Technologies Ltd in the past five years. For instance, Cognizant improved revenues by 50% in the year until December. In the nine-month period between April and December, Infosys managed growth of only 36% in dollar terms.
In the past five years, Cognizant has beaten Infosys by an average of 15 percentage points each year; it beat Wipro Ltd also by 15 percentage points, and Satyam Computer Services Ltd by as much as 20 percentage points on an average each year.
Based on this historical trend, Indian companies can be expected to grow at a much lower rate. But then, lower growth rates had been factored in by most analysts and, if anything, Cognizant’s outlook does quell some concerns about the impact of the US slowdown on IT services providers. The company’s surveys reveal that although there could be some belt-tightening by clients, spend on offshore work will increase in order to use the IT budget effectively.
Cognizant’s guidance of a 38% growth compares well with an average guidance of 42.5% in the past four years, especially considering the change in business environment and the fact that its revenue base has grown nearly six times in the past four years.
But as the chief financial officer of one of India’s largest IT companies points out, the budgets finalized with clients at the beginning of the year are not “cast in stone.” If US financial services companies continue to face pressure, they could well demand price cuts and discretionary IT spend. Simply put, the future of Indian IT stocks is as uncertain as the US economy itself.
Inflation rise bad news for some
The rise in the inflation rate to more than 4% is another signal that the Reserve Bank of India (RBI) is unlikely to cut rates in a hurry. There are two reasons for the rise in the inflation rate for the week ending 26 January: a rise in the prices of non-food primary products and an increase in the prices of manufactured products. There was also a jump in the minerals category, but that accounts for a very small weight in the overall index.
According to the latest wholesale price index (WPI) numbers, the rise in the prices of primary articles is 3.9% year-on-year. Of this, the rise in food prices is 2%, while that of non-food prices is a very high 9.2%. The price of cotton, for example, has gone up sharply.
But there’s not much that monetary policy can do to bring down the prices of non-food articles. Rather, what will bother RBI is the rise in the prices of manufactured products, which was 4.2% as on 26 January, compared with 3.9% a week ago. This is a sign that higher input prices are being passed on. That’s clear from the recent increases in steel, cement and car prices.
There isn’t much spare capacity and the problem is also that in the current high liquidity environment, with money supply (M3) growing at 23.8% year-on-year, it’s easy to pass on the price hikes.
Money supply is increasing mainly because of the continuing rise in the net foreign exchange assets of the banking sector. This rise continues despite the slowing down of foreign institutional investor inflows—as on 18 January, the year-on-year increase in net foreign exchange assets was 34.8%, compared with 30.7% a month ago. Until money supply growth abates, therefore, RBI is unlikely to reduce interest rates. That bodes ill for interest-rate sensitive stocks.
Pricking the IPO bubble
The markets have corrected about 20% from their highs in January. It’s not entirely surprising then that initial public offerings (IPOs) priced prior to or in the middle of the correction have bombed. Emaar MGF Land Ltd, for instance, cut its price by 13%, although the Bombay Stock Exchange (BSE) Realty index has fallen more than 18% since Emaar fixed its price band. According to many analysts, Emaar was priced high.
But IPOs have been priced high for some time now, although somehow all parties concerned came out winners (except those who borrowed funds for applying and got a much lower allotment). Otherwise, the company itself raised its targeted amount, pre- IPO investors got firm allotment and saw a marked appreciation in the value of the holdings and IPO allottees also gained when the stock listed at a premium.
Indeed, the Wockhardt Hospitals Ltd and Emaar issues didn’t suffer entirely because of high pricing but also the uncertainty of funds locked for about three weeks in a volatile market. A position in the secondary market can at least be liquidated in case of a market crash, but not so with IPO allotments.
The withdrawal of two large IPOs has hopefully woken up investors to the risk involved. The clutch of pre-IPO investors in Wockhardt and Emaar are good examples of bets gone awfully wrong. At least until euphoria resurfaces, bankers and companies may now be reasonable with IPO pricing. When the markets crashed in May 2006, issues such as that of Deccan Aviation Ltd barely made it, and pricing started to get reasonable. The discipline was lost once market sentiment turned euphoric again. But this is the first time large IPOs have been withdrawn and hopefully we are all wiser now.
(Write to us at marktomarket@livemint.com)
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First Published: Sat, Feb 09 2008. 01 24 AM IST