IT puts a dampener on markets

Mon, 9 Aug 11:30 am

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After starting today's session on a flat note, Indian indices have started to move into the positive territory. Other key Asian markets are trading in the negative with Japan and Singapore well in the red. Stocks from realty and consumer durables space are finding investor favour at the moment. However, stocks from IT and oil & gas sectors are in the red.

The BSE-Sensex is trading up by around 65 points, while the NSE-Nifty is up by around 20 points. Strong buying interest is being witnessed amongst the mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.8% and 1.3% respectively. The rupee is trading at 46.08 to the US dollar

IT stocks are trading mixed with Aptech and NIIT leading the gains. HCL Technologies and Oracle Financial Services (OFS) were however at the receiving end. OFS recently declared its 1QFY11 results. Sales for the company fell by 14% QoQ due to a sharp decline in license fees, that led to a decline in product related revenues. The company's IT products business (comprising 61% of consolidated sales) declined by 26% QoQ during the quarter. This contributed to a 79% QoQ decline in license revenues. Its IT services business saw some growth, with a 16% increase QoQ. But, this could not offset the decline in the products business.

Operating margins declined by 10.1% QoQ during the quarter due to a decline in sales and an increase in operating expenses. Net profits however, grew by 24% QoQ during the quarter. This was driven by higher interest and other income compared to a negative figure during the last quarter. Lower tax outlay also helped boost the net income. The company added 11 new customers during this quarter, and signed new licenses of US$ 7.2 m. This was however down 77% QoQ.

As per leading news daily, RBI has endorsed a view that banks need to exercise caution while lending to micro finance institutions (MFIs). The directive to several banks came in after the successful IPO of SKS Microfinance - flagging concerns regarding the business model of several players in the MFI segment. RBI is of the view that worsening credit quality and risk of default can persist if inadvertent lending continues in the MFI ecosystem.

Under the current regulations, bank lending to MFIs falls under the purview of priority sector lending. This allows banks to keep lesser provisions on the same. As a result MFIs can access funds at cheaper rates which enables them to lend at higher rates factoring in margins in excess of 15%. However, this pushes up the interest rates for the end borrowers to about 30% defeating the essence of MFI lending. However, as MFIs have the scale and can outreach poor people they cannot be ignored altogether. Thus, RBI is of the view that these MFIs need to be monitored more closely in order to avoid overheating in the financial system.