Sector dynamics to curb IT firms' margins: Templeton

Franklin Templeton Mutual Fund said that although top-rung information technology companies offer good growth potential in the medium to long term, their margins are expected to come down owing to the dynamics of the sector.

According to Franklin Templeton Mutual Fund's weekly equity market report, domestic markets bounced back during the week helped by increased buying by both domestic and foreign institutions.

After opening on a weak note on the previous Monday (August 29), major indices rallied sharply on Tuesday and the momentum was maintained for the remainder of the week.

The auto sector was in the limelight after the finance minister hinted that the government would be revisiting the tax structure for smaller cars.

The government also announced that the Cabinet Committee on Economic Affairs (CCEA) has approved the sale of 8 per cent government equity in Maruti Udyog to public sector banks and financial institutions. At present, the government holds a 18.28 per cent stake in the company.

Cement firms attracted buying interest on the news of increased despatches and Oil and Natural Gas Corp (ONGC) announced a major gas discovery in the Krishna-Godavari basin.

As per the latest reports, rains were 21 per cent below normal in August but rainfall as a whole in the first three months of the season starting June was 94 per cent of the long-period average, indicating near normal performance.

The Sensex added 2.86 per cent for the week, while the Nifty moved up by 2.49 per cent. On the other hand, CNX Midcap index rose 2.9 per cent. Foreign institutional investor (FII) inflows were to the tune of $218.6 million in the first four trading days.

The consolidation phase being witnessed in the global generics industry in recent times (Teva & Sandoz), appears to have had an impact on domestic pharmaceutical companies. The sector has been rife with M&A speculation with reports indicating that Ranbaxy and Wockhardt are targeting Alpharma.

Lupin and Torrent have reportedly put in bids for Polish drug major-Jelfa. Indian companies are looking at acquisitions in Europe given the fragmented market and acquisitions would provide scale, access to existing dossiers, drug master files, and USFDA approved facilities.

Larger companies in the technology sector are better positioned to take advantage of the global outsourcing trend due to their management and process strength, brand equity and scale of operations.

And the fact that global companies have been setting up Indian operations was an indication of the growing stature of the domestic sector. All these factors were reflected in the recent ABN Amro deal, which saw the Dutch financial services group announce one of the biggest outsourcing deals in Europe, giving the Indian IT sector-Tata Consultancy Services, Infosys Technologies and Patni Computer Systems, lucrative contracts under a five-year programme.

According to the report, this deal could be a turning point for the domestic sector, and indicates that Europe is becoming an important growth driver for the sector and larger size deals will start coming to Indian companies going forward.

Overall, the top-rung companies in the sector offer good growth potential over the medium to long term, even though margins are likely to come down due to the dynamics in the sector.