Ways2Learn: June 2009

Tuesday, June 30, 2009

IT looks at sunny days as deals begin to flow

Small Deals Offer Big Hope Ahead Of Q1 Show

AS COMPANIES in the $60-billion technology services sector gear up to announce results for the first quarter of 2009-10, the straws in the wind suggest that they may have weathered the worst of the global economic downturn.
    The biggest indication is the return of the deal flows, albeit in smaller sizes of about $25-30 million. A welcome development considering that in the past couple of quarters clients had battened down the hatches by suspending discretionary spending, freezing IT budgets and putting offshoring decisions on hold.
    Many of the new deals involve what is referred to as 'business transformation outsourcing', where an Indian vendor would work with a client to reshape entire processes such as payroll or HR administration to make them more efficient and achieve cost savings.
    In May, India's largest software exporter TCS signed a five-year deal with the Volkswagen Group in the UK to provide IT support and transformation of its IT infrastructure. TCS also bagged a contract from ABB in the UK to implement business software. Wipro signed a $34-million contract to extend a deal with Sunoco, a US-based marketer of petrochemical products. 'IT sales growth in Q1 will not exceed 15%'
IT SECTOR analysts believe that sales growth during the April-June quarter will not exceed 15%, but agree that the software services industry could be looking up. The first big result for the IT sector begins with India's secondlargest software exporter Infosys Technologies on July 10.
    Infosys has forecast a decline of 6.5-8.2% in its dollar revenues and a 11-13% increase in rupee terms for the quarter ended June 30, 2009.
    Research and advisory firm Booz & Co as well as investment bank Avendus Advisors see sales growing by 10-15% for the top six IT companies. Suvojoy Sengupta, a partner at Booz & Co, expects operating margins at over 20%. "Of course, it's a massive scale down from the 40% operating margin levels which companies had got used to," he says.
    However, Gartner, an IT-focused research company, predicts single-digit sales growth quarter-on-quarter for the sector.
    While the Q1 results may only be marginally better compared with the previous couple of quarters, the outlook seems more promising. Says Partha Iyengar, vice-president and senior analyst at Gartner: "We have started getting calls from clients (in the US and Europe) on how to cut costs by offshoring. These are positive signs. We have already hit the bottom. But we might see a recovery only by late 2009."
    Software industry grouping Nasscom has said that it expects single-digit export growth during 2009-10. Some analysts are advising investors to stay away from the sector in the short term. "I don't see a recovery any time in the next two quarters. Infosys, however, has a habit of giving conservative guidance and may spring a positive surprise," says Dhirendra Kumar, CEO, Value Research Online, a mutual fund watcher.
    Harit Shah, IT analyst at Angel Broking, agrees that a wait of at least two quarters is warranted before a revised outlook is pronounced.
    "In the short term, we might see single-digit sales growth for top tier IT majors. Year-on-year, we might see a flattish sales growth. However, in dollar terms, we might see a dip for some IT companies," he said. Operationally, the manpower-intensive sector, which employs about 2.3 million, continues with its freeze on recruitment. Selective hiring is, however, on for those with specialist skills in areas such as enterprise resource planning, business software and IT architecture development, but the numbers are negligible. There is also a greater focus on shifting employees and work from client locations onsite to offshore destinations such as India.
    Among the positive signs is that the domestic market looks attractive despite lower margins compared to exports. Also, with former Infosys co-chairman Nandan Nilekani now part of the government to oversee the Unique Identification Card Project, domestic IT spends could get accelerated. Telecom, e-governance initiatives, state-run companies and the Indian Railways are throwing up newer opportunities for IT. While export-focused companies look at the domestic market as well, the revival of confidence, especially among US clients, bodes well for large and small players.
    "Clients feel that the worst is behind them. Especially in the US, many customers took aggressive measures to cut costs and renegotiate contracts," says S Gopalakrishnan, CEO of Infosys.
    Infosys Australia recently won an IT application development and maintenance contract worth A$450 million (Rs 1,800 crore) from Telstra, a large Australian telecom company.
    A weaker monsoon this year is expected to increase agriculture imports, and thus weaken the rupee just as the rise in crude oil prices has weakened the Indian currency. Buoyed by the hope of recovery, IT companies are now going all out to spend more to win new contracts and increasing their sales force.
    However, challenges persist. As KS Ananthanarayan, CFO, Birlasoft points out, the biggest challenge now is getting new business. "Companies are investing a great deal in salespeople, and there is an increased focus on incumbency of clients," he says.
    Infosys, for instance, added 217 employees to its sales and marketing team in FY09, its highest ever since the company was founded in 1981, according to Edelweiss Research. Similarly, Wipro, HCL, TCS and Birlasoft have augmented their sales teams. But this strategy needs to be improved with a focus on business rather than technology.
    "In the current scenario, multinational IT companies are still winning new contracts because of the effectiveness of their marketing teams which are focused on selling business needs. In comparison, Indian sales staff is focused on selling technical needs," remarks Gartner's Mr Iyengar.
    One reason for that could be the lack of topend skills and consulting capability. To plug this gap, companies are looking for acquisitions. The IT & ITeS sector accounted for 50% of cross-border acquisitions in 2007-08 and 40% in 2008-09. Buyouts like HCL's acquisition of Axon last year will provide the much-needed boost.
    Overall, the road to recovery seems visible now and companies just need the critical fuel in the form of new business to reach the end of this fiscal, after which offshoring is expected to see its next peak. Till then, the road is tough, but at least the worst is behind them.

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Ways2Health Overweight children at higher risk of asthma

Govt may take action against RIL on KG gas

Says RIL Can't Commit National Property Without Its Nod; RNRL Says HC Ruling Overrules Executive Decision

THE government is contemplating penal action against Reliance Industries (RIL) for committing 28 million standard cubic meters of gas per day (mmscmd) from its KG basin block to Reliance Natural Resources (RNRL) at a price of $2.34 per million British thermal units (mmBtu) as part of the Ambani family settlement without the permission of the government.
    "RIL is merely a contractor for the KG basin block (D-6) and not the owner. Two promoters (read Mukesh Ambani and Anil Ambani) can't divide a national property between themselves without the government's approval. The matter is being examined," a senior official in the know told ET, requesting anonymity.
    The government's intention of penalising RIL was first broken by ET NOW, this newspaper's business channel, on Tuesday evening.
    The proposed penalty could come as a blessing in rather thin disguise for RIL, which would like to negate any contractual obligation on its part to supply gas to RNRL at a price of $2.34 per mmBtu, significantly lower than the government-set price of $4.20 per mmBtu at which RIL is selling gas to other users.
    An RNRL executive claimed that such a move against RIL would in fact help the company in its dispute with RNRL. According to this person, the government had approved the proposal to sell gas to RNRL at the lower price as "part of its approval of the scheme of demerger."
    When asked for comments, a senior RNRL said: "These aspects (price, term and quantity) are adequately and clearly covered in the judgement of the Bombay High Court." The high court ruling clearly overrides any executive order. The only option for RIL is to approach the Supreme Court, if it disagrees with the order.

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NO DEVIATION YET

IN the last derivatives dairy, we discussed how the Nifty may have to undergo a strength test even after continuous out-performance over its US complement Dow Jones Industrial Average (DJIA).
    However, not only did the Nifty remain in a tight range of 240 points last week but also the June futures showed a weak rollover into the July series. After losing more than 1% during the first four days of the week, the Nifty rebounded only on Friday. This rise however followed Dow's gains on the previous day as the US index managed to bounce back towards its 200 Day Moving Average (DMA).
THE STRUGGLE
As we pointed out last week, the 76.4% retracement of the rally from March'09 to Mid–June (from 2539 to 4693), at 4180 turned out to be a good support. However, as can be seen from the first chart, the crossover of 10 DMA below 20 DMA, is weighing on the Nifty. Even as the Nifty managed to close past its 10 DMA on Friday, a strong resistance is expected to emerge in the coming week at the 20 DMA (currently at 4446) level. This resistance also coincides with the support line extending from the March 2009 lows, which was breached last week.
ROLLOVER ANALYSIS
With the expiry week in place, the Nifty was expected to show some striking moves as it did in the last four months. However, the rollover in the July series at 54.6% showed a sizeable decline from the average rollover of the last four months at 69.9%. A look at the open interest data in the last one week reveals that from Tuesday, the addition in July futures open interest was higher than the decline in open interest in June series (see table). The premium of July futures over the underlying index also rose from 10.5 to 17.8 on Thursday. However, a decline in the July put call ratio (PCR) from 1.22 to 1.10 during the period indicates that number of calls written outpaced the number of puts.
    On Thursday, the July 4700 calls held the highest open interest of 14 lakh shares, while the 4200 puts held the highest open interest of 20 lakh shares. Even as the 4200 puts added the maximum open interest of 9.5 lakh shares, the 4300 calls experienced the maximum addition of open interest, of 4.8 lakh shares. This indicates that as on Thursday, 4200-4700 was perceived to be a key trading range for the July series.
DOW NEAR 200 DMA – RESEMBLING DECEMBER 2007?
In last two diaries, we highlighted how the 76.4% retracement has worked efficiently during all the corrective phases, which came since March 2009. This magical level seems to have supported the Dow last week. As can be seen from the second chart, the Dow showed a rebound closer from 8300, which is the 76.4% retracement level of the index's move in the latest rally (from 6470 to 8878).
    After briefly moving above the crucial 200 DMA in the first week of June, the Dow gave away these gains in the second week. On Thursday again, a rebound from that retracement level and subsequent gains brought it closer to the key indicator.
    The Dow's current position is similar to the last week of December 2007. As shown in the third chart, after a decline from its peak in October, the Dow managed to move past 200 DMA in the first week of December but fell below it in the second week. In the third week, it managed to surpass this crucial indicator, but the gains were given away for good towards the end of the month. One important difference between these two is the positioning of 100 DMA. While in December 2007, the 100 DMA was acting as strong resistance, it can act as a strong base this time around.
FRESH TRADE
While the support at 4180 held well last week, the call was not initiated as we recommended going long only when the Nifty moves past the 20-DMA. The analysis on Friday shows that July 4300 puts added huge 6.7 lakh shares in open interest, while 4200 continue to hold the highest open interest. Meanwhile, the July 4700 and 4400 puts experienced a piling of 5 lakh and 4 lakh shares respectively. To sum up, with the market's close above 4300, the important resistance range has now shifted towards 4400-4450.
    Since the Nifty is still capped by 20 DMA level, we recommend being on the sidelines. While a breach past the above mentioned resistance range could bring back the index on a gaining streak, a crossover of 10 and 20 DMA will be essential for the rally to continue.
    devangi .joshi @timesgroup .com