January 02, 2000

Stock valuations and the dot.com conundrum

It seems certain that the absurd valuations in the software business will end and the bubble burst may be triggered off by a big collapse in the US and not in India

Do software stock valuations make any sense? It is the question to which everybody but the die-hard gamblers are seeking an answer. Top fund managers, stock brokers and finance experts are all equally clueless and groping for an answer. One Fund Manager is even nervous about his Asset Management Company’s plan to launch an Infotech Fund. He shudders at the prospect of making investment decisions without any fundamentals or missing the boat by being too picky. The lemming like rush to get into e-commerce and set up web-based businesses, he fears, will force him to buy stock simply because he cannot afford not to invest. When the world has gone crazy and angels (yes, angel investors) are rushing in where even fools would fear to tread, it is clearly danger time.

But look at it another way. If a Rs 13 share touches 70 plus in two days and a stock which was at Rs 250 touches Rs 8000 by the time you find out enough about the company, you are considered foolish or ignorant for staying away. Increasing valuations is simplicity itself. The CRISIL stock sky-rocketed after it went dot.com and offered its database on the web. ICICI Chief K V Kamath is the most blatantly open about his expectation that the ICICI scrip should look good merely after announcing e-plans. He recently told fund managers that ICICI ought to be valued at around Rs 250 and that the market was not giving the stock its due.

Sure, the internet and e-commerce is going to change our lives, but how many of the investments in software companies make sense at these prices? The game, as punters say, is about being able to pick companies which understand the business and recognise the fakes. It is about figuring out who is in tune with the net world and those to whom it is yet another copy-cat foray. The software stock mania today is identical to the IPO rush of 1993 to 1996 — it is driven by greed and fake promises and is bound to collapse. Too many of those getting into the business today simply do not understand it. Several have announced ambitious plans to set up portals but neither surf the net nor have found out what is already available. They often take pride in saying that they will learn as they earn (from gullible investors).

Jamal Mecklai of Mecklai Financial, who recently morphed his highly rated company into eMecklai has a more extreme world view. To him, those who do not understand technology, or their consumers and stakeholders will be wiped out. The future, he says is about transparency, liquidity and accessibility. ‘‘You can run but you can’t hide’’ is his line. So he offers a simple test: ‘‘First of all, send an e-mail to the CEOs of every company whose shares you own. If you don’t get a reply within 24 hours, sell the stock.’’ (Jamal usually replies within 12 hours). Only do business with people who look you in the eye, even if electronically.

I don’t own stock, but often need answers to my queries. Here is what I encountered. The government has several good sites and public sector companies often have really excellent and interactive websites, but very few reply to specific queries. Hughes Software, whose stock continues to soar over Rs 3800, had its public relations executive telling me that the CEO could not be contacted for a week because he was travelling. Satyam Infoway, paid Rs 490 crore for IndiaWorld Communications, but its CFO says that he couldn’t reply to an email because he was travelling. This, in the days of global roaming and email.

Even the great Infosys would have failed Jamal’s 24-hour test, but it did reply after six days. Even companies with a net suffixed to their names or with mega plans to create internet backbones and information superhighways have yet to grapple with the basics of electronic communication. Savvy fund managers do not read email or even own a personal email address.

The most dangerously net-illiterate are senior bureaucrats, legal professionals and the judiciary (there are always the few welcome exceptions). Some want to learn but are embarrassed to learn. These are crucial decision-makers in the country and unless they get wired up we cannot expect sensible policy-making.

The Information Technology bill will provide an impetus for the industry only when those in government begin to understand IT. In fact, getting government babus wired-up and introducing them to the phenomenal information base opened up by the net, is probably a service which Dewang Mehta of Nasscom and Ganesh Natrajan of Aptech should offer through their companies and associations.

Another target for net education are politicians. Websites for political parties are not enough. They have to be used to reach people and gather information. Net savvy politicians will be better informed and well-informed politicians may lead to sensible legislation. Someone should also tell politicians that net savvy is not something that can be absorbed through some sort of osmosis by rubbing shoulders with net-billionaires of Indian origin.

Stock exchanges and the regulators are not known to respond with any great alacrity — if email is from investors. They are much more responsive to the media. Among government departments, the Department of Company Affairs (DCA), however, is a truly remarkable exception. DCA Secretary, T S Krishnamurthy not only responds to email, but has on occasion resolved problems within a matter of hours, and several investors do vouch for this. As for manufacturing companies in the private and public sector, the less said the better — among the exceptions is the Bajaj Auto Chairman Rahul Bajaj.

My arbitrary and random survey even with its tiny sample indicates that we have a long way to go towards understanding the Internet, leave alone making a huge amount of money. To quote Jamal again, ‘‘dinosaurs are simply elephants who never learned to dance’’. And there are plenty out there who have declared themselves dancers and have yet to start moving their feet. Many will make serious money on the net, but these new entrepreneurs looking at simple business opportunities which have a clear product and revenue streams and are not based on page views and eyeballs which can vanish very easily.

Given the risk involved, it seems certain that the absurd valuations in the software business will end and the bubble burst may be triggered off by a big collapse in the US and not in India. When that happens, the smart or lucky ones who exit in time or churn their stock enough to book profits will still be smiling while the suckers will look for someone to blame — like the Securities and Exchange Board of India.

 

Updated weekly.

The author's e-mail address is: suchetadalal@yahoo.com

Other columnists:

Other articles by the columnist FICCI and Assocham's double standards No privatisation but give-away of PSUs Divestment: A saga of trial balloons & confusion How to put off non- resident investors A deal to change the net business forever The Rs.2,291 cr plus bonanza for Essar Steel The scam ligitation crying out for speed Is anybody fooled by MAFA anymore?