It’s no coincidence that the market has rallied at a time when there have been substantial net inflows by foreign institutional investors (FII). These have been unusually high in the past two weeks. Since 29 June, FIIs have brought in $3.5 billion (Rs14,175 crore), 45% of their entire investments this year. Year till date, inflows stand at $7.85 billion, just $150 million short of the investments seen in the whole of 2007.
Before jumping to major conclusions, it must be noted that investments into big-ticket IPOs, DLF and ICICI Bank, accounted for almost two-thirds of the inflows in the past two weeks. Besides, there were two qualified institutional placements (QIP) by IDFC Ltd and Sadbhav Engineering Ltd amounting to Rs2,190 crore. But even after adjusting for this, net inflows were strong at more than Rs3,210 crore. One would have imagined that their huge inflows (Rs 8,800 crore) into the DLF and ICICI Bank IPOs would have caused FIIs to go slow on secondary market investments because of a cash crunch. Instead, they have brought larger than usual amounts.
At times, inflows into the cash segment are offset by short positions taken in the futures market (and vice-versa), to gain from arbitrage opportunities between the two markets. But this time around, FII inflows in the futures market have also been positive. They took long positions worth Rs1,100 crore in the futures market in the past two weeks.
What’s also surprising is that the huge inflows have come despite outflows from India-dedicated funds monitored by Emerging Portfolio Fund Research (EPFR). EPFR had said last week that India funds saw outflows for the 11th straight week.
In sum, foreign institutional investors have not only easily absorbed large fresh supply of shares through IPOs and QIP, but have also continued to buy heavily in the secondary market. This augurs well not only for the secondary market, but also for companies such as Tata Steel and State Bank of India, which plan to tap the markets for fund-raising.
iGate Global Solutions
Mid-sized software companies were expected to be hit worse than their large-cap peers because of the appreciating rupee.iGate Global Solutions Ltd, for instance, saw its shares fall about 24% since the time it announced its March quarter results, compared to a mere 3% drop for Infosys. Some of it had to do with the company’s 9% exposure to the mortgage industry in the US, which is in the midst of a meltdown. But the expected impact of the rupee on profit had a large role to play as well.
Yet, despite these odds, iGate did well to restrict the impact on operating margin at a little over 200 basis points. (Infosys’ margins fell by over 300 basis points).
Like Infosys, iGate took salary hikes in April, but what worked for them was an increase in the proportion of offshore work as well as a higher increase in price realizations over the March quarter. Offshore rates rose by more than 2% quarter-on-quarter (Q-o-Q) and the proportion of offshore work jumped by over 300 basis points. Besides, employee utilization increased sharply from 67% in the March quarter to 71% last quarter.
It’s not that iGate’s results were full of positive surprises. Revenues fell by over 5% because of the twin impact of the rupee and the slowdown in the mortgage business. This vertical now accounts for 7% of total revenues, implying that it fell by over 25% last quarter. Offshore volumes grew at a healthy pace of 7.6% sequentially, but analysts are now worried that growth is restricted to the top five clients. All other clients put together have seen a drop in revenues even on a year-on-year (Y-o-Y) basis. Profit after tax fell 25% Q-o-Q, but rose by as much as 16 times on a Y-o-Y basis. This reflects the improvement in iGate’s fundamentals in the past year, thanks to the growing revenues from its top clients, increased billing rates and better utilization.
While the exposure to the mortgage business has removed some of the sheen from its growth story, analysts continue to be positive on the stock. At current levels, it trades at 13 times FY08 earnings, much lower than the expected growth of over 30% in the next two years.