The Hindu : Interpreting a leader's performance

Online edition of India's National Newspaper
Tuesday, Apr 15, 2003

Opinion

Opinion - Editorials

Interpreting a leader's performance

THE PERIODIC GYRATIONS of stock prices are to be expected in any market but the sharp declines in specific stocks as well as the benchmark indices last week seem to have a more than normal significance. The BSE Sensex's fall to below the psychologically important barrier of 3000, its lowest level in the past five months, is a matter of special concern in the post-budget period. This year, the stock markets have shown a particularly pronounced tendency to stay detached from major economic policy pronouncements, including the budget. That is not a happy development, reflecting as it does poorly on the maturity of the stock market mechanism. More evolved capital markets serve as testing grounds for economic policies. In India, however, despite the customary hype spectacularly seen during the budget seasons the stock markets have not proved to be a good enough gauge. Since macroeconomic policy making is clearly not benefited, there is a strong case for furthering capital market reform. However, a much talked-about agenda like that does not provide solutions to the immediate problems on hand.

The market's sharp reaction to the publication of the financial results of Infosys, one of India's most admired technology companies, has to be understood in its broad context. Surprising as it may seem, Infosys's results had met its own earnings forecasts both in terms of net profits and revenue growth, the latter, in fact, by a wide margin. However, there is ample evidence that the future of some of India's top-notch companies may not be as rosy as they have been even in the immediate past. Profitability has come under strain because of cutthroat competition in the developed markets, especially the U.S. which accounts for the bulk of the earnings of technology companies. In the case of Infosys what seemed to have particularly upset the stock market was its forecast of earnings for the current year, a growth of 13 to 15 per cent as against a market expectation of over 20 per cent. As has been the case with its financial performance, the company's forecast for the immediate future is comfortably above the industry's average. Yet, the market's disappointment has been such that practically all technology stocks have joined Infosys in the decline. Since information technology stocks have been accorded special weightage in calculating the broad market indices, it is not surprising that they too have been dragged down.

There are at least two significant messages from the above. The reaction in the stock markets to technology stocks in general probably presages a declining confidence in the abilities of certain companies to meet even the wildest of expectations. That by itself need not be unwelcome. There is every reason to encourage a more balanced view of stocks in general and technology stocks in particular. The world over, the outlook for technology companies has been gloomy, a fact exacerbated by the continued downturn in the major economies. Indian IT companies such as Infosys which have made the country a force to be reckoned with have to face the emerging realities of the global market place. Overseas customers are reportedly driving a hard bargain while negotiating. Pricing pressures on the margins of companies are becoming all-too-visible. It is no surprise that protectionist tendencies are coming to the fore, the opposition to outsourcing in a few American States being just one example. Investors in the Indian equity are probably realigning their preference although it is naive to be unduly pessimistic over last week's technology-led crash.

Equally important is to revisit the basic assumptions that have guided official and popular thinking towards the markets. It is inevitable that the overwhelming fascination for technology stocks will be replaced by a more balanced view of all sectoral stocks. In the investors' eyes the standing of a few companies such as Infosys has been such that their performance was mistakenly equated with those of all companies. Some of the latter have been laggards in business and even more importantly in ethics. Those did not seem to matter when the going was good, when the sterling performance of the top IT companies more than compensated for the other shortcomings. Clearly those days have come to an end.

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