gfiles magazine

February 9, 2011

STOCK DOCTOR | gs sood
Worrisome dip in growth

THE Indian economy has been growing at a brisk pace despite the government – this is perhaps the best way to describe the latter’s failure to address reform-related issues due to its preoccupation with those relating to corruption, inflation, political manoeuvring and so on that have not only swallowed the huge financial resources of the nation but also kept the policymakers too busy. No headway has been made on reforms relating to goods and services tax, subsidies, land acquisition, foreign direct investment in retail and insurance, companies Bill, direct taxes code and so on. I do not expect any of this to happen quickly with the worsening fundamentals of the economy, political compulsions and other pressing problems that may take up the time and energy of our policymakers.
The growth may therefore be seen to be faltering. Most analysts have started revising the growth targets for 2011-12 downwards and appear happy with an 8% target just now. On the other hand, they have revised the target for the inflation index upwards which is way off the policymakers’ expectations. The RBI’s latest policy statement shows that it is more worried about inflation than growth. Also, top officials have admitted that they do not have adequate tools to control inflation which essentially remains a supply side issue, mainly affected by factors such as weak monsoons leading to lower farm output, rising global commodity prices led by crude, rising incomes in towns and villages, inadequate infrastructure support leading to logistics problems and so on.

Nucleus Software
(CMP Rs 110)
THE company is a global software firm engaged in providing products and software solutions to the banking and financial services industry and recently won the Gold Shield for Excellence in Financial Reporting 2010 awarded by the Institute of Chartered Accountants of India (ICAI) for the third consecutive year. The South Asian Federation of Accountants (SAFA) also awarded Nucleus’ Annual Report the joint first runner-up position for the Best Presented Accounts Award for 2009 under the Communication and Information Technology Sector Category.
Though the consolidated results for the nine-month period ending December 31 has not been very satisfactory, the future looks promising for the company. It has made investments in newer markets and channel partners that have delivered substantial wins with over 40 orders this financial year. For the quarter ending December 31, 2010, the company has won 10 new orders, added eight customers, won orders for 34 new products and has successfully implemented 35 product modules worldwide.
With a book value of more than Rs 72 and likely EPS exceeding Rs 10, the stock is available at a PE of around 10-11 as against the industry PE of 28. The company is debt-free and has excellent management. The promising outlook for the IT sector in view of the revival of the advanced economies and the stock being available at a 52-week low makes it a compelling buy.

The rising inflation is threatening the domestic demand-led growth theory that has so far attracted most of the FIIs. The slowing growth may further impact the fiscal situation during 2011 due to lower tax revenues, increasing food, oil and fertilizers subsidy and the missing 3G windfall. All this will adversely impact the corporate earnings growth which till date has remained robust as shown by the Q3 results. But it has started feeling the pinch with profit margins of companies shrinking due to rising input costs, including of raw materials, interest rates, wage bills, and so on. If the latest Q3 results of some prominent companies such as HUL, Asian Paints and the like are any indicator, operating margins may be under stress for companies across various sectors. Though the 25 basis points hike in repo and reverse repo rates by the RBI is seen by the markets as a timid response to fight inflation that gave the policy a thumbs-down, rising interest rates have already played havoc with the realty, auto and banking stocks. The only silver lining may emerge from rising exports and the hope that the IT sector will do well due to the revival in the developed world.
SEBI has prohibited the office bearers of Investor Associations (IA) empanelled with it from recommending stocks. Being the president of a leading Delhi-based IA, I will have to limit myself to writing about the economy and the markets.

The author has no exposure in the stock recommended in this column. gfiles does not accept responsibility for investment decisions by readers of this column. Investment-related queries may be sent to with Dr Sood’s name in the subject line.

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