Losing drive

The market had already factored in large deals by infotech companies

The enthusiasm over the multi-million dollar ABN Amro outsourcing deal has died down already in the stock markets. The NSE's CNX IT index dropped by 0.35 per cent on Friday, even though the Nifty was busy hitting new highs.

The order, which involves five vendors, marks the largest order ever for both TCS and Infosys. Clearly, the deal marks a milestone for the Indian IT industry.

Apart from being the largest ever deal, it displays the increasing presence of Indian vendors in multi-million, multi-year contracts right from the early stages of the arrangement. Analysts point out that it speaks of the strong capabilities built by Indian players in application support and maintenance space.

Nevertheless, since the revenue flow is spread out over five years, the impact on revenues of both TCS and Infosys would be less than 2 per cent in FY07, when the full impact of the deal would be visible. Contribution to overall profit could be even lower, given that such large deals normally come at lower prices.

In any case, talks of such large deals being in the pipeline have been doing the rounds for a long time. In fact, it's for this very reason that IT stocks, especially larger ones such as Infosys, have performed well this year.

But while growth potential for IT companies looks strong, especially with large orders flowing in, the near-term earnings estimates look optimistic.

Although most analysts tempered earnings estimates after June quarter results, consensus FY06 estimates for top IT firms still require earnings to grow at an average of about 10 per cent on a quarter-on-quarter basis for the next three quarters. That could be a tall task given the lacklustre performance of the industry in the past couple of quarters.

With that background, the fact that stocks such as Infosys are trading at all-time highs and at forward multiples of about 27 times calls for caution.

Bilt

Ballarpur Industries (Bilt) will increase prices of uncoated paper by Rs 750 per tonne from October 1""""-this would result in its product prices for this segment ranging from Rs 34,000-35,000 a tonne.

The company had earlier raised uncoated paper prices thrice since April 2005, and they are about 12 per cent higher on a y-o-y basis.

However, manufacture of low-value uncoated paper account for merely 25 per cent of its production of 3,78,349 MT at the end of its financial year ended June 2004.

Meanwhile, in the key high-end paper segment, realisations are approximately Rs 4000 - Rs 5000 higher for every tonne sold vis-a-vis the lower-end paper segment.

The company will invest Rs 150 crore this financial year in a bid to raise production capacity by 35,000 tonne. The company will finance this expansion by utilising a part of the $85 million (approximately Rs 375 crore) raised via FCCBs earlier.

An increased proportion of high end paper will also help the company tackle cost pressures arising from higher input costs such as caustic soda and chlorine.

Nevertheless, the company is in a better position vis-a-vis its peers in terms of cost management, thanks to its forestry operations close to its mills.

Its effective cost management strategy was reflected in the last quarter "" the company reported a 9.5 per cent growth in its profit before taxation to Rs 53.35 crore in the June quarter, despite sales rising merely 1.74 per cent.

Bond markets

The bond markets have been awash in liquidity in the last few weeks, reflected in the money supply numbers. Money supply (M3) growth this fiscal to August 5 has been 6.7 per cent, well above the 4.6 per cent growth for the corresponding period last year.

Surprisingly, it's not foreign inflows that are responsible for the higher M3 growth. In fact, net foreign exchange assets of the banking sector have risen by a mere Rs 804 crore this fiscal, compared to a rise of Rs 55,322 crore during the same period last year.

Rather, the main reason for the higher money supply growth has been bank credit to the commercial sector, which has risen by Rs 88,265 crore this fiscal (till August 5) compared to Rs 55,588 crore in the same period last year.

In recent weeks, however, there has been a reversal of trend. Between July 22 and August 12, the RBI bought dollars hand over fist, and forex reserves went up by $6.837 billion.

Earlier, reserves had been falling steadily this fiscal. The addition to reserves has been reflected in net forex assets of banks, and these rose by Rs 23,567 crore between July 22 and August 5. (Contrast that with the decrease of Rs 8,168 crore in net forex assets during the entire month to July 22).

In other words, it's only since July 22 that forex inflows have been driving liquidity, although FII inflows have been strong since May. The reason, of course, is the RBI's buying up dollars.

The surprise is that the RBI started its vigorous defence of the rupee since July 22, a day after the revaluation of the Chinese renminbi. At the time, it was widely expected that the revaluation would put upward pressure on the rupee, as the RBI could afford to let it float. Instead, the rupee is now much lower.

But with forex reserves falling in the week to August 19, and with FII inflows slowing down, liquidity in the money market is likely to be less abundant going forward.

With contributions from Mobis Philipose and Amriteshwar Mathur