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STOCKMARKETS Going Down The Tube Bottom trawlers lick their chops as tech-stocks nosedive. But can one safely buy now? -Abir Pal The storm shows no signs of blowing over. Barely do the stockmarkets manage to recover from one tidal wave before the next one comes crashing down. Buffeted by bear cartels, banking scams, several allegations of insider trading, and rogue traders, Indian equity markets have been hopelessly floundering around. Taking toll is painful: last fortnight, the Sensex was down to a 28-month low, wiping out half of its gains since February 2000, when the 30-share index had spurted to a high of 6,150-that's a mind-boggling erosion of some Rs 200,000 crore in market capitalisation. Stock graphs don't make for pleasant viewing: Infosys at a 20-month low; HFCL losing almost 95 per cent of its market cap gains in two months; Zee Telefilms hitting the 16 per cent lower circuit with unnerving regularity...''God! If the Sensex continues to fall 150 points everyday, in a month's time most Indian companies will be available for free!'' exclaims Gul Teckchandani, Chief Investment Officer, Sun F&C. That may be an exaggeration, but the market hadn't shown any signs of bottoming out when this magazine went to press. The trigger (yet another one) for last fortnight's carnage was doubtless Infosys Technologies' pared-down growth forecasts for 2001-2002-a mere 30 per cent, compared to the 80 per cent-plus figures chairman Narayana Murthy & Co. have been used to, quarter after quarter. If any confirmation was needed that the Indian software services bandwagon was slowing down, this was it. A few days later, another software company Mastek reinforced the trend by showing a 95 per cent plunge in profits for the third quarter. And most of the other software majors are expected to 'follow the leader' (Infosys).
Industry chieftans for their part are talking in euphemisms. ''We are cautiously optimistic about the growth prospects but given the declining trend I am not really sure, for the moment, which way the it industry is heading. It is difficult to make a general statement on the happenings in the marketplace though we hope the industry will revive,'' says B. Ramalinga Raju, chairman, Satyam Computer Sevices. Also hear out D.V.S. Raju, Managing Director of VisualSoft Technologies, which recently issued a profit warning: ''What is happening in the industry is a badly needed correction. Sound and proven companies will grow, but may be not at the pace at which they have been growing in the past.'' It isn't as if the ice meltdown has come as a bolt from the blue. Ever since the slowdown in the US economy became evident, the writing was on the wall for the Indian software services sector-although one section of the industry insisted that the slowdown would mean increased outsourcing from India. Today, even diehard tech faithfuls, like Bharat Shah, CIO of Birla Sunlife, are bracing themselves for tough times ahead. ''The going is not going to be easy. We are looking at more conservative growth rates from the tech sector,'' shrugs Shah, adding that even other sectors like pharmaceuticals and FMCG appear lacklustre. Meantime, John Band, CEO of brokerage house ask Raymond James, feels that Infosys' share price deserves the hammering it's got. ''Infosys has always been more of a employee-friendly company rather than a shareholder-friendly company. Margins will definitely be under pressure, especially when they continue to hire new people and invest $80 million dollars in a new office,'' he points out. The silver lining? It's not easy to locate, but you have to wonder: can things get worse? ''Most (tech) stocks are quoting at 5-10 per cent of their highs. I mean how much better does it get than this,'' wonders Sun F&C's Teckchandani. These days, though, the greed on Dalal Street has been replaced by fear. But now could well be the best time to be greedy-if you have the stomach for it. -with additional reporting by E. Kumar Sharma TRANSFER PRICING Transfer pricing may put MNCs at a disadvantage. But, for its part, the government faces an uphill task of fair assesment While Yashwant Sinha's budget was a pleasant surprise for most, the innocuous sounding Section 92 of the Finance Bill has rattled trans- nationals in India. For, in a first, the Indian government is talking transfer pricing (the price paid for a product or service to a sister concern). When the government issues its final notifi- cations on transfer pricing, expected at the end of May, it could force many transnationals operating in India, to change the way they work. For instance, do companies like GE Capital International Services, which performs backroom functions for its parent concerns, get compensated fairly for their services? Because if they don't, the Indian government loses out on corporate taxes. Or, does Maruti Udyog pay a fair price to Suzuki for its imported components? If it doesn't, Maruti would be shortchanging the government on customs duty. Says Shashi Kapila, Tax Consultant, Standard Chartered Grindlays: ''Most multinationals and Indian enterprises that have cross-border transactions with associates will be affected.'' The government wants to ensure that it gets the maximum tax possible, by making sure that the correct amount of profits are booked in India, and not in countries with lower tax rates. What companies need to do is provide evidence to the government that their Indian concerns are compensated fairly. That's the trouble. Says Mukesh Bhutani, Partner, Arthur Andersen: ''How do you prove that a fair price has been paid? Whose data do you use, mine or a third party, to ensure that a fair price is paid?'' For instance, one software company in India could develop a product in 200 man-hours, while another could take 500 man-hours. And both would charge their parent concerns accordingly. Can it be said that the company that developed the software cheaper is not charging a fair price? The way to do it is to be able to show that if the product were to be sold to an unrelated party, it would sell at the same price. For instance, if GE Capital International Services were to provide the same service to someone else, the same billing rates would apply. Where companies don't do any third party sale, it will be difficult to prove that a fair price has been paid, unless there is enough industry data to go by. Industrialised countries are themselves evolving transfer pricing regulations, as it is a contentious issue in those countries too. Most transnationals and tax experts are nervously awaiting the notifications. What the government needs to keep in mind is that while trying to ensure higher revenue for itself, it doesn't choke off foreign investment. -Ashish Gupta
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LAPTOP:
Toshiba Tecra 8100. My laptop is as widely travelled as me. I
can't imagine life without it. I also use it to listen to
music, hold Net Meetings with colleagues, and communicate on
msn Messenger with people across the world. When I am not busy
with it at home, my year-old son occasionally tries his hand
at it.