On shaky ground

Both global and domestic cues are pointing downwards

Infosys' lower-than-expected guidance was seized upon by the markets as the excuse for a general sell-off. Stocks plunged across the board, with losses seen in sectors as diverse as technology, metals and banking.

But it is an indication of the increasingly global nature of our markets that many brokers attributed Friday's crash not to the Infosys results, but to the sell-off in Brazil on Thursday, where the Bovespa fell 4.2 per cent, the largest drop since May 10 last year.

The argument "" Brazil's market is predominantly made up of commodity players, and has much in common with India. On cue, the BSE metals index was the second largest loser among sectoral indices after the IT index.

Sentiment in the steel sector has been hit by slowing demand in the auto sector both in Europe and the US, and by reports of large capacities coming on stream in China during the second half of the year.

Commodities have also been hurt by the rise of the US dollar, which has remained buoyant in spite of a widening US current account deficit. In IT, IBM's profit warning has also been a trigger.

The sell-off in global markets has also been attributed to the IMF's prediction of slower global growth in 2005. Recall that three weeks back markets fell on worries of higher interest rates in the US.

The point to be made from these contradictory reasons for selling is that markets are nervous, and latch on to any excuse for offloading stocks. Nor is it only stocks that have been hammered "" emerging market bond spreads have widened as well.

Normally, global weakness would be the perfect time to focus on domestic plays. Unfortunately, rising input costs, higher interest payments and disappointing macro data on industrial production and on the infrastructure sector seem to indicate that the domestic sector as a whole may not be a refuge, despite pockets of performance, such as in capital goods.

Reliance Energy

Reliance Energy has reported a 53.9 per cent growth in its net profit to Rs 154.5 crore in the last quarter, helped by improved performance of its EPC and contracts division and a surge in "other income". "Other income" has grown 132 per cent to Rs 122.91 crore, largely due to higher treasury income.

The revenues of its electrical energy division were more or less unchanged at Rs 661.51 crore. Energy sales have dropped. Average realisations were pegged at Rs 3.6 per unit in the last quarter compared to Rs 3.34 in the previous year.

However, tax on electricity has doubled and cost of fuel has risen 5 per cent. As a result, segment profit declined 40.5 per cent to Rs 44.13 crore.

The upturn in the power industry's capex cycle has helped the company's EPC and contracts segment profit to expand 381 per cent to Rs 61.33 crore in the last quarter. This division has an order book position of Rs 3500 crore at the end of FY05, up from Rs 1200 crore last year.

Operating profit (excluding other income) grow 22 per cent to Rs 189.09 crore in the last quarter. However, higher input cost has led to operating profit margins shrinking 593 basis points to 12.88 per cent.

The company has focussed on expanding its distribution network. In addition, they have applied to regulatory bodies for distribution licences in numerous circles.

Till these projects are fully operational, the company's growth in the short term will be largely determined by the engineering contracts it bags.

The market, however, appears to have already factored in the company's growth opportunities.

Geometric Software

The accepted wisdom is that large sized IT companies have been growing at higher rates compared to their mid and small sized counterparts. One exception to this rule is Geometric Software.

This Rs 168-crore company grew revenues at 58.6 per cent in FY05, and even after excluding revenues of the company it acquired last fiscal, revenue growth was impressive at 55.5 per cent.

What's more, it's given a revenue growth guidance of 40-45 per cent (in rupee terms) for FY06. Adjusted for the acquisition, growth is expected to be between 35-40 per cent.

However, for the March quarter, revenue growth, adjusted for the TekSoft acquisition, fell to 7.2 per cent. Overall operating profit fell 16 per cent because of a number of extraordinary factors including a shift in the company's corporate office, the opening of a new sales office and acquisition-related expenses.

Besides, an appreciating rupee hit margins, while the impact of performance-based bonus to employees was felt in the March quarter. Thankfully, other income jumped because of gains on its forward cover position. This resulted in a 12.9 per cent jump in profit before tax sequentially.

Geometric expects earnings to grow 45-50 per cent in FY 06, slightly higher than the rate at which revenues would grow. This is mainly because of savings on SG&A expenses and gains the company hopes to book on its forward cover.

While the acquisition of TekSoft will boost its products revenues, its entry into engineering services last fiscal will be one of the drivers of its IT services business.

The company's onsite services grew by 132.6 per cent last fiscal, much higher than the 42 per cent growth in offshore services. This points to new engagements entered into last fiscal "" if moved offshore, this will provide a boost to earnings.

Based on the higher end of the guidance, Geometric trades at about 13 times FY06 earnings, which is in line with its mid cap counterparts, but way below estimated growth rates.

With contributions from Amriteshwar Mathur and Mobis Philipose