Is 2008 going to be like 2000? After the 17% fall in the BSE Sensex from its highs in the last seven trading sessions, the question uppermost in investors’ minds is: Is this just another of the bull market corrections we’ve seen in the past few years or is it the beginning of a bear market?
The last bear market started in 2000 when the tech bubble burst in the US, dragging markets across the world down with it. At that time, the Sensex plummeted from a high of 6,150 points in February 2000 to a low of 3,491 in October that year, a 43% drop in eight months. It then bumped along that level, sometimes falling even below 3,000 points, till it started recovering three years later in mid-2003.
The markets were overextended then, as they were a few days ago. The price-ear-nings (P-E) multiple for the Sensex was 25.5 on the day when the market reached its top on 14 February 2000, while it was 29 times on 10 January 2008, when it reached a high of 21,206.
But in 2000, there was no sudden sharp correction— instead, it was a slow grind downward. This time, the correction has been like the bull market corrections of May 2004 and May 2006. However, those were caused by worries that higher interest rates would lead to funds flowing out of emerging markets and the markets easily righted after the initial panic wore off.
The credit crunch, however, is not going to go away in a hurry and the current sell-off is not the result of any scare. Risk-aversion is back with a bang and the broad sell-off in risky assets is seen from the yen going back to around 106 against the dollar, within a stone’s throw of a two-and-a-half-year high.
Euphoria had set in in the Indian markets, seen from the outlandish valuations of companies that didn’t have any businesses. There has been a substantial correction, but markets tend to overshoot and nobody knows when a bottom will be reached. The Indian market had outperformed nearly all other markets in the last three months and we’re now doing some catching up on the way down. The Sensex’s P-E is back to where it was at the middle of September. In the market’s downward cycle of euphoria-anxiety-denial-fear-desperation-panic and finally capitulation, Monday’s market action certainly smacked of panic.
But there are also plenty of differences between now and 2000. GDP growth was 6.4% in 1999-2000 and 4.4% in 2000-01. This time, it’s much higher. Savings and investment rates are also higher, with investment demand the main driver of growth. The biggest difference, however, lies in interest rates—the yield on the 10-year government bond was 11-12%, compared to less than 8% now. Add to that the huge build-up of forex reserves and the economy is far stronger now than it was in 2000. If it’s indeed the start of a bear market, it will be a very strange one, with a GDP growth of more than 8%.
Satyam: Ahead of peers
Satyam Computer Services Ltd has raced ahead of its peers in the IT space this fiscal as far as volume and revenue growth is concerned. But the company’s profit margins have fallen the most, leading to the same mediocre profit growth Tata Consultancy Services Ltd (TCS) and Infosys Technologies Ltd have reported.
Satyam has now reported volume growth of more than 9% for four consecutive quarters. For perspective, TCS and Infosys grew volumes by about 4% last quarter. On a year-on-year basis, its volumes have continued to grow by more than 40%, while growth dropped to a multi-year low of 24.6% at Infosys. According to the company’s chief financial officer, V. Srinivas, this is the result of growth in the enterprise business solutions space, an ability to extract higher volumes from existing clients, and large deals that were won last year and are now contributing significantly to revenues.
But in the nine months till December, Satyam’s earnings before interest and taxes have risen by just 14.8%, slightly lower than the growth reported byTCS and Infosys. While the appreciation in the rupee has had an impact, what has hurt Satyam more is the largesse shown to employees. Employee costs have risen by 350 basis points and now account for 62.6% of sales. While this has helped rein in high attrition (down for the sixth quarter in a row), margins have been hurt.
The company has tightened its belt in other areas, but for which the margin decline may have been worse. Utilization rates in its offshore facilities, for instance, have risen from 68.5% in the year-ago December quarter to 78.2% last quarter. It has also benefited from higher price realizations. On a year-on-year basis, average rates have risen by more than 6%.
But analysts are mainly enthused about the high, volume growth, and this was the main reason Satyam’s shares were the least affected IT stock in the carnage on Monday. It now trades at a mere 9% discount to TCS and a 14% to Infosys based on the trailing P-E multiple.
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