IT continues to dampen markets

Fri, 15 Oct 11:30 am

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After starting today's session on a positive note, Indian indices have lost ground in the last two hours and are currently trading in the red. However, other key Asian markets are trading mixed with China up 2.6% and Japan down 1%. Currently, heavyweights in the Sensex are trading weak with stocks from the realty space seeing the maximum gains. However, IT and banking stocks are trading weak.

The BSE-Sensex is trading down by around 103 points, while the NSE-Nifty is down by about 35 points. However, there has been limited buying interest amongst the mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.2% and 0.7% respectively. The rupee is trading at 44.07 to the US dollar.

IT stocks are mainly trading weak with the 3 biggies Wipro, TCS and Infosys leading the declines. Infosys announced its 2QFY11 results today. Sales grew by 12% QoQ helped by all its segments, particularly the company's bread and butter business of 'application development and maintenance'. Sales from Europe recorded a robust 20% QoQ growth during the quarter. Recovery from North America continued during the quarter with a sales growth of 10% QoQ. Operating margins improved to 30.2% during the quarter compared to 28.3% during the previous quarter. This is largely due to lower cost of sales as well as lower administration costs. Better operating margins and an increase in other income led to a growth of 17% QoQ in net profits. The company added 27 new clients during the quarter taking the total number of active clients to 592. The attrition rate however, continued to remain high. It stood at 17.1% at the end of the quarter, compared to 15.8% at the end of the previous quarter (June 2010).

Bank stocks are mainly trading mixed with Axis Bank and Federal bank leading the pack of losers.  However, DCB and J&K bank are trading strong. As per leading news daily, India's largest public sector bank, SBI is planning to raise Rs 10 bn through a bond issue. The bank plans to issue a 10 year and 15 year bonds carrying an interest rate of 9.25% and 9.50% respectively. However, it may be noted that SBI already has 10 year deposits which carry an interest rate of 7.75%. Thus, we believe the move of raising money via bonds may not be profitable for the bank. This is an experimental move by a bank so as to gauge the attractiveness of the issue. If this proves to be successful, it will be a rival source of attracting money in future. SBI is also planning to list the bonds on the NSE so that the retail investor can liquidate his holdings and thus have an exit option prior to the maturity.