IT STOCKS – FROM “MOST FAVOURED” TO “LEAST FAVOURED”

IT stocks have been hammered down mercilessly by the punters over the past few days. Stocks which were touted as blue chips are today being sold off by investors. Well, if legendary institutions like Lehman and Morgan can collapse, can we say even talk about blue chips today?



So why have the markets turned sellers on the IT counter? Falling rupee, US crisis, liquidity issues, hike in interest rates, inflation; anything and everything seems to be responsible. When the markets crashed three days ago, IT stocks, along with realty led the fall.



In the meltdown on 29th September, TCS was amongst the biggest losers of the day and it touched a new low at Rs. 612.10. Satyam also touched a new 52-week low at Rs.289. Infact 150 stocks hit a new low that day and prominent IT stocks amongst them were Patni Computers, 3iInfotech, eClerx, Hexaware and Mindtree.



The quake on Wall Street has rattled the Indian IT companies as they earn roughly half their revenue from US. With a further slowdown seemingly inevitable, there is no doubt that business is expected to take a hit. No doubt, when the rupee appreciated last fiscal, to reduce their dependence on the US dollar and to spread their risks, IT companies had started exploring markets in Europe, Middle East and Asia. So companies which have managed to spread their tentacles and reduced their dependence on USA would be impacted slightly lower. Yet, the current crisis is not about the dollar alone, it has affected BFSI business all over the world, so irrespective of the region, business is expected to face a slowdown.



What came as a complete shocker were the front liners hitting a new low. So what exactly was the cause? There is widespread fear that the meltdown in the US financial system is expected to hit the business of IT firms badly as quite a sizeable chunk of their income comes from US banking, financial and insurance sector (BFSI). Infact around 40% of TCS revenue comes from BFSI. TCS is stated to have the highest exposure to the BFSI sector and with this crisis and spate of bankruptcies, naturally, all were in a tearing hurry to offload TCS as quickly as possible. Of the top five Indian IT companies, TCS services Morgan Stanley while Goldman Sachs is an important client for Infosys.



Ironically, Satyam is stated to have the lowest exposure to US, yet it touched a new low. Across-the –board-selling and there was so much panic that the trader just did not want to wait on the IT counters, irrespective of the companies exposure to US.



What about Infosys? During the first quarter ended 30th June 2008, 35% of the company’s revenue came from BFSI which was at around 36% for FY08. Infosys services 6 of the 7 large US banks, 6 of the top 10 securities firms, 4 of the top 5 European banks, 6 of the 8 top mortgage orginators. How many of them exist today? US accounts for 60% of the company’s revenues; that somehow no longer seems reassuring, it has infact become a cause for worry.



To make matters worse, National Association of Software and Service Companies (Nasscom), in a recent report has stated that growth of Indian software and services could be slower than expected in 2008/09 and it is expected to revise its growth projections in December. It had forecast revenue growth between 21% - 24% to about $50 billion in FY09. The third and fourth quarters are expected to be exceptionally difficult.



There is no doubt that given the current scenario, business is bound to take a hit. Re-negotiations and new negotiations would be put off for some time. This fiscal, FY09, despite the dollar appreciation, would be tough on the Indian IT companies. The short to medium term outlook for IT companies does look bleak. The market is always right; we just have to learn to look at the indicators to know the reasons. Infosys is to declare its results on 10th October. That will give us the cue for the fiscal.