Survey buys decoupling theory

Survey buys decoupling theory
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First Published: Fri, Feb 29 2008. 12 12 AM IST
Updated: Fri, Feb 29 2008. 12 12 AM IST
At a time when market experts are busy rubbishing the “decoupling” argument, the finance ministry seems to have bought it lock, stock and barrel. Not content with making the usual anodyne positive-in-the-long-run statements, the Economic Survey disregards the current volatility in the stock markets and sticks its neck out in making short-term predictions. This is what the survey had to say: “In the short term, expectation of higher relative returns from investment in India, favourable risk perception of investors and improved global liquidity would help the country in being an attractive destination for investment. Going forward, despite the possible subdued global growth, the strong fundamentals of the Indian economy in tandem with higher growth would help in sustaining the interest of domestic and foreign investors in the Indian market.”
In short, it’s the old India as a safe haven argument and while it may be stretching a point to say the finance ministry is bullish on the Indian markets, the clear implication is that we should do better than the other markets, even in the short run. The survey adds that resources with Indian financial institutions will also find their way into the market, while funds from insurance companies will also provide support. While it’s true that large amounts of money did find their way to India last September and October after the US Federal Reserve’s rate cuts, India has also been one of the worst performers in 2008.
The fact that India’s market capitalization as a percentage of gross domestic product (GDP) was the highest among the countries listed by it doesn’t seem to have shaken the finance ministry’s faith. According to the survey, India’s market cap as a percentage of its GDP was 150% as on 31 December, compared with 128.8% for the US and 137.3% for China. The Sensex is off around 13% from that date, but other markets too have corrected.
What about the ”fundamentals”? The survey says that corporate earnings remain “encouraging”. Also, while it does talk of a slowdown in industrial growth, it points out that “the slowdown, shown by the available data on consumer durables, may not in itself be a cause of serious concern in the long run, provided the overall buoyancy in growth and income is maintained.”
IT stocks that returned 100% last year
The year 2007 was the worst ever for IT stocks, with the National Stock Exchange’s CNX IT index underperforming the broader Nifty by 43%. In January this year, the IT index underperformed by another 5%.
Given this backdrop, it’s interesting to note that two stocks in the IT space have delivered returns of over 100% between January 2007 and January 2008. Another three have given returns of over 50%.
This is based on an analysis done by Edelweiss Securities Ltd’s IT analysts. The study excludes stocks which had an average market cap of less than Rs1,000 crore during the period.
Companies that topped the list of returns were Core Projects & Technologies Ltd and Rolta India Ltd with returns of 144% and 102%, respectively, between January 2007 and January 2008. Tanla Solutions Ltd, which listed in early January last year, has risen 63%, followed by Geodesic Information Systems Ltd (52%) and Transworld Infotech Ltd (50%).
Edelweiss notes that each of the above companies have a niche and/or differentiated business model, with Core Projects operating in the growing education and e-governance segments and Rolta gaining from its expertise in geospatial information services (GIS). Rolta’s high exposure to the Indian market also means that the appreciation in the domestic currency has had a minimal impact.
The business model of Tanla and Geodesic differs substantially from that of traditional IT services players, as it’s driven by intellectual property and licence fees. Such a model results in nonlinear growth, which in other words means that revenue and profit growth doesn’t move in tandem with the increase in employees.
While most IT companies continue to battle attrition and wage hikes, those with a non-linear model are much better off on that front. Having said that, it must also be noted that there are some concerns about accounting practices at Core Projects and the sustainability of the price increase in Transworld, which has a plain-vanilla business model but rose because of restructuring and subsequent consolidation.
The study is interesting for two reasons: first, investors haven’t shunned all stocks that have anything to do with IT. Secondly, the markets seem to have already started the process of picking out companies in the sector that have a differentiated business model.
The stocks that made up the bottom of the pile are not all that surprising. Sasken Communication Technologies Ltd and Subex Ltd revised their guidance mid-year and Hexaware Technologies lost most of what it earned in the year by buying the wrong derivatives contracts for its hedges. These stocks have more than halved since last January.
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First Published: Fri, Feb 29 2008. 12 12 AM IST