HCL Tech: Underperforming peers

HCL Tech has missed the rally in IT stocks

HCL Technologies reported splendid results for the quarter ended June 2004.

Revenues grew 14 per cent over the March quarter and operating profit rose at an even higher rate of 32 per cent. For the full year ended June 2004, revenues grew 35 per cent and operating profit increased 45 per cent.

From the investors' point of view, HCL Tech has almost Rs 70 per share in cash and cash equivalents, and of late the company has got aggressive in its dividend payouts.

In FY04, the company paid out Rs 10 per share, and it's likely that payout would be Rs 16 this fiscal. If that's the case, the HCL Tech stock currently has a handsome dividend yield of 4.6 per cent.

What's more, adjusted for the cash on its books, it trades at a forward PE of just 13 times. It turns out that HCL Tech has, more or less, been left out of the current rally in tech stocks.

While NSE's CNX IT index has risen around 42 per cent since May 18, HCL Tech has risen just 24 per cent in the same period.

In the past, HCL Tech underperformed its peers because of the spate of mergers and alliances it got into, and the drag they had been on overall profitability.

But going by the FY04 results, things seem to be getting better. Growth has been robust for the past three consecutive quarters, while operating margin improved 150 basis points to 20.3 per cent in FY04.

Bank stocks

Banks have been taking the brunt of the rise in market yields, and bankers have given unambiguous profit warnings.

And if there were any doubts about the direction of interest rates, the Reserve Bank's recent decision to hike bank's cash reserve ratio (CRR) should have removed them.

Surprisingly, the Bankex doesn't seem to reflect this uncertainty about the sector. In the week to September 16, the Bankex actually moved up marginally, despite all the signals emanating from the CRR hike.

Why should bank stocks continue to do well, despite all the bad news? It's not only the effect of a depreciation in banks' investment portfolios that's the problem "" the CRR hike will impound bank resources; the emphasis on agriculture will do likewise and probably raise non-performing assets; the wage settlement in public sector banks will hit their bottomlines; and the RBI's dislike of allowing foreign banks to takeover Indian banks will hamper consolidation, and affect M&A activity, leading to lower valuations.

But take a closer look at the Bankex, and the action isn't really so surprising. Some stocks have risen because of block deals in recent days. But the Bankex is down substantially since its heydays before the May 17 carnage.

For example, it was down 17.3 per cent between May 10 to September 15, while the Sensex was down 2.4 per cent over the same period. SBI was down 27.5 per cent, BoB down 25 per cent , ICICI Bank down 12 per cent, while HDFC Bank moved up 2.6 per cent.

Clearly, the market has taken a rational decision based on the way the different banks are likely to be affected. Nevertheless, bank stocks would probably get hit even more once they report disappointing second quarter results.

Emerging markets prospects, according to IMF

The IMF's Global Financial Stability Report for April had warned about the dangers to emerging markets as a result of a rise in interest rates in the US.

It had pointed to the 1994 experience, when there was a broad sell-off in emerging markets as a result of monetary tightening by the US Federal Reserve.

Clearly, the sharp fall in emerging markets in May this year confirmed the IMF's expectations. The September Financial Stability Report is now out, and it notes that markets have been able to adjust remarkably well to the prospect of monetary tightening.

The new report points out that "The decline in emerging market equities was highly correlated with the decline in the mature equity markets, suggesting that global factors, including shifting interest rate expectations, had ripple effects through mature and emerging markets."

Since May, conditions have improved, and even sub-investment grade countries have been regained access to global markets. And although financing costs for emerging markets have risen, "they remain much lower than the average for the last five years."

So long as the markets continue to expect a muted outlook for inflation in the developed countries, emerging markets can continue to bask in the warmth of this Indian summer.

Also, thanks to Asian issuance, international equity issuance from emerging markets this year is on track to go beyond the record $41.8 billion in equity raised in 2000.

While equity issuance fell in April and May, emerging market equity issuance was back in business in June. Since the report also says that there's a risk that today's markets have become too complacent, shouldn't Indian firms rush to avail of this window of opportunity?

With contributions from Mobis Philipose