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Aaron Chaze and Deepak Singh Tanwar
Software stocks continued to rally in a big way in the market on Wednesday. The results from Infosys Technologies and Satyam Computers continued to exceed market expectations and so the market obviously is very bullish about the prospects for these companies.
This is especially true for Infosys Technologies that has been consistently doubling profit after tax. The PAT for Q3 is up by 119 per cent while cumulatively for the three quarters it has improved by 123 per cent. It is reasonable to expect that the trend in earnings will continue and the market will continue to offer a high discounting to these companies.
Infosys is showing why it is the most popular stock going around. Improvements have been recorded on all parameters. Q3 revenues have improved by 94 per cent. Profit before taxes and extra-ordinary provisions have improved by 164 per cent.
Even the rate of growth in profits has improved in the second quarter. It has a historic P/E multiple of 65 times but the forward P/E is still 40 times, based on expectations of March 1999 earnings and indicating the kind of growth that the market expects from the company. The Infosys stock was frozen at the circuit level early itself on Wednesday, leading all other software stocks to the circuit breaker. Even Global Telesystems which is just beginning a foray in software has begun to attract a lot of speculative buying.
The bullishness as a result of these performances and also due to the performance put in by companies such as DSQ Software and BFL a few days earlier has percolated into those companies yet to announce their third quarter earnings. NIIT continues to be a market favourite and so does Aptech.
Even a stock like Rolta was frozen at the higher end of the price circuit. The situation now is such that the other popular pivotals with the probable exception of Tata Tea, IPCL and some telecommunications stocks were more or less ignored.
Nestle: The Nestle stock has shown a technical break-out last week. The stock price has moved above the 9-month trendline, which in technical terms is a very positive signal and indicates a rally ahead.
Incidentally,, the fundamentals of the company also point toward a more positive outlook for the stock.
The financial performance, which has been impressive, will continue to be encouraging. During the first nine months (January-September) of 1998, the company has done well.
The improvement in margins have been gradual but as a result of focussed operations. During the second quarter, the company recorded a 13 per cent sales growth over the first quarter figure of Rs 369.9 crore. Operating margins at the same time improved from 9.81 per cent to 11.32.
The growth in sales was mainly on account of 30 new launches in chocolates and confectionary during 1997. During the third quarter, though the sales growth was mere 2.63 per cent over the second quarter, margins on the operational level improved from 11.32 per cent to 13.85 per cent as a result of price increases which is a regular annual feature (this is done more or less in line with inflation).
Cost-cutting has played a major role in providing a boost to profit margins. Lower interest further helped the growth in profit before tax.
For the full year, the company is expected to post a sales growth of 17 per cent. On the net level, profits are expected to show a 30 per cent plus growth. Exports to the Russian market is expected to improve which coupled with an expected depreciation of rupee should also help the company. Raw material prices (coffee, cocoa) are expected to remain low.
Further, there has been an increased thrust in exports of coffee beans and chocolate to Russia. As a result, overall, the company will continue to perform well. And if that is the case, the stock market cannot ignore the company.
The MNC status and its defensive nature of business has already given the stock a handsome historic discounting of more than 50 times earnings.
And in a more positive environment, a further improvement in discounting is not impossible. In the last one month the stock has increased by 15 per cent, but has been a steady gainer earlier as well.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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