Cover story: Making Of The Sense Sensex [Pg. 2]

Making Of The Sense Sensex
Contn.

The Tech Effect

The lustre of tech stocks may have waned a little in the US and yesterday's favourites, infotech services companies like Scient and Viant may have posted early profit warnings. But Indian infotech companies continue to have a bright future and are expected to grow at around 40 per cent. According to a study done by Motilal Oswal Securities on software service companies, even if one were to go beyond numbers and look at the challenges ahead qualitatively, the macro and micro picture shows that the potential for growth is still intact. Indeed, analysts do not expect to see any sign of a slow-down when the better infotech companies declare their second quarter results in the first week of October. Says Shah of Triumph Securities: ''Growth will continue to come from technology stocks.''

Shah's assessment is based on the assumption that valuations in the tech sector are back to realistic levels. That's a debatable call: Is Wipro at Rs 2,638 (down from the 52-week peak of Rs 9,000) cheap? Or Infosys, at Rs 7,357, down from the 52-week peak of Rs 13,813, reasonably priced? And is HFCL, at Rs 1,282, worth 48 times its PE?

The answer to all three questions could be yes. But the market isn't without its share of analysts who believe even these PE multiples high; even GE boasts a multiple of just 50. For every person who believes the only way to go for tech stocks is up, there's another who insists they will be cheaper six months from now. Still, if tech-stocks are going to be driving the market, there are volatile times ahead.

Economic Forces And The Market

No stockmarket can afford to remain disconnected from the immediate economic environment in which it operates. Unfortunately, there have been several negative developments in this space in the Indian context. ''Several micro economic variables have changed for the worse,'' admits Rukhsat Shroff, 29, Strategist, Chase Jardine Fleming. The details: the growth in industrial production dropped to 5.4 per cent in the first quarter of 2000-01 against 5.7 per cent in the same period of the last fiscal; and the rupee hasn't exactly covered itself in glory, sliding to beyond Rs 46 to the dollar. Then there is the oil thing. Says Arjun Mittal, Economist, American Express: ''Oil prices should decrease over the next year, towards $25-30 per barrel range. While oil at these prices will continue to hurt the trade balance and provide an upside risk to inflation, I do not expect the WPI to go much beyond 7 per cent.'' However, should oil spike towards $40 on a sustained basis, it could bring inflationary tendencies to the fore. Viewed in the light of the oil price hike (which will, apart from hurting corporate bottom-line, cause inflation rates to soar), all this doesn't exactly add up to a conducive macro-economic environment.

Where's The Market Headed?

That's a tough one. The bears expect things to get worse (3,700, they say), and the bulls, better (5,200-5,400 by March, 2001 is their call), but that's only to be expected. Doshi of Morgan Stanley is circumspect in his predictions (actually he doesn't make one): ''The market is looking for a direction and waiting for a trigger.'' That trigger could be anything. Remember, this is a market that was looking healthy in August, 2000. Rues, Abhay Aima, 38, Country Head (Equities & Private Banking), HDFC Bank: ''Between August and September, 2000, nothing has changed, except (the) oil (scenario).'' But that's been enough to wipe away Rs 1,00,613 crore of market capitalisation in less than 28 days. Now, no one is speaking about the Sensex crossing 6,000. And even those who do expect that to happen at least 10 months from now. (BT was unable to talk to P.S. Subramanyam, UTI Chairman, to find out if he stuck to his guns-Sensex 6,000 by Diwali. When BT met him on September 7, he said: ''This year Diwali has come early. The Sensex will reach 6,000 by November.'')

Our advice: forget the Sensex, look at the intrinsic strengths of companies, and be willing to wait it out. The debate over the direction the market will eventually take will continue into the next year, and the prudent investor will refrain from betting on whether it will move up, or down. Should you be unduly perturbed by the activity of the Sensex? Not really, but a little bit of fear won't do any one any harm.

Additional reporting by Rakhi Mazumdar

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