Thursday, March 09, 2006

The Indus View Publication, Volume 2 Issue 2

If the stock market were a bellwether for the economy, one word would describe India’s economy: “sizzling.”

The Mumbai Stock Exchange Sensitive index, or Sensex, crossed the psychologically important level of 10,000 for the first time in the history of Indian stock market. Moreover, it held it’s ground.

Hot Economy
The economy continues to grow as higher wages spur spending. India's middle class has tripled to 300 million, or about a third of the population, in the past two decades. The National Council for Applied Economic Research qualifies such people as those earning between $4,545 and $23,000 a year. Bank loans to companies and individuals rose 32 percent in the six months ended Sept. 30, the biggest increase since the central bank started collecting data in 1971.

The trend toward offshoring of software development continues unabated. An emerging $1.25 billion market is predicted for development of animation at $950 million and gaming software at $300 million in four year's time. That's according to NASSCOM, the trade body for India's 900 IT companies.

Personal computer sales in India registered a growth of 36% at 2.3 million units during the first half of the current fiscal year ending March 2006. That led the Manufacturers Association of Information Technology (MAIT), the representative body of computer manufacturing companies, to revise its annual projections to 4.7 million units from 4.25 million, for this fiscal year.

To top it off, India added a record 4.5 million new mobile phone subscribers in December 2005 following the abolition of charges for incoming calls by many operators. Analysts predict new phone subscribers will surpass 5 million new accounts per month at some point this year, on par or in excess of the absolute growth in China. India added about 30 million new telephone users during the year 2005, the highest addition to date in any single year. About 4.9 million users were added in December 2005 alone, of which 4.5 million were mobile phone users, taking the total telecom subscriber base to 125 million. The tele-density has gone up to 11.43% compared to 8.6% in December 2004

Stock Index
India's key “Sensex” stock index will probably climb for a fifth straight year in 2006 as listed companies' earnings improve and overseas investors pump more money in to the countries stock market.

The move to 10,00 from 9,000 in just 48 days, raises the question as to whether such a sharp rise is justified.

That question, however, has been posed ever since the Sensex touched the mark of 7,000 on June 20, 2005.

Valuation Concerns
Some analysts have expressed concern about the “stretched valuations” - the notion that the current price to equity ratio of 18.36 for the Sensex makes its stocks more expensive than other emerging markets. Morgan Stanley’s MSCI Emerging Markets Index is currently trading at 14.5 times, cheaper than Sensex. It is interesting to note that while the Sensex moved from 9390 on January 02, 2006 to 10,000 on January 06, 2006, the P/E ratio of the Sensex came down from 18.60 to 18.36 as the earnings growth in the quarter ending December 2005 was factored in.

Citigroup Inc. rated Indian shares as “overvalued” last month and forecast the Sensex to slide in 2006 as earnings growth slows. Merrill Lynch & Co.'s New York-based strategists termed India as the most expensive emerging market in November 2005 and recommended investors to sell Indian stocks cautioning about the possibility of fund inflow getting slow. The fact is, however, that the net foreign funds flow of $805.10 million in January 2006, and $550.40 million in the first five trading days of February 2006, were the main drivers for the Sensex to reach 10,000. The Indian market attracted a record $10.6 billion of funds from foreign investors in 2005, second only to Taiwan in Asia, excluding Japan. The local funds also have collected more than $2 billion in the month January 2006 alone through their new fund offers (NFOs).

Foreign Investors
Overseas investors have bought $572.2 million worth of shares this year, according to the latest figures from the Securities & Exchange Board of India.

India is seen to be a liquidity driven market now with the rise in capital markets being a function of India’s fast growing economy, the world’s second fastest – and rising corporate earnings.

India's $665 billion economy is growing at a pace that is second only to China among the world's 20 largest economies. The Gross Domestic Product (GDP) growth rate was 8% from a year earlier in the quarter ended September 30, 2005 and is estimated to grow by 8.1% for the fiscal year 2005-06 ending March 2006 compared with 7.5% in the previous fiscal year. On the corporate earnings side, a study of 200 stocks done by Kotak Securities showed an average of 23% earnings growth in the quarter to December 2005. Expectations are even higher, as Indian companies have scaled up their capabilities and enhanced their efficiencies. The scale of corporate expansions was reflected in the Bank loans to companies and individuals that rose 32% in the six months ended Sept. 2005, the biggest increase since 1971. The economic reform process continues - the government recently opened the retail sector for foreign direct investment, albeit with restrictions.

Correction or Justification
Many analysts now expect a correction in the market. Macro-level changes such as a sharp increase in oil prices or a regional conflict notwithstanding, there is little reason for the Indian markets falling much below these levels. The upside, on the other hand, may also be limited and it’s unlikely to generate the 40% return seen in 2005. This does mean, however, that if the market keeps the pace with the earnings growth - a 15%-20% year-on-year growth - is well justified.

Bundeep Singh Rangar
Chairman, IndusView


Deal Watch
January 2005 was the month of media, in terms of M&A deals as well as public issues. Jagaran Prakashan, the publisher of India’s largest Hindi news paper, Multiplex chain Inox Leisure and FM Radio company Entertainment Network (India) Ltd entered the primary market to raise capital. A consortium of three companies including Malaysian broadcaster Astro and Indian TV news broadcaster New Delhi Television (NDTV) bought Radio Today that runs FM radio channel under brand name Red FM.

Global Outlook: Vinod Dham
What are the trends to watch out for in the year 2006? Tech pioneer Vinod Dham believes that WiMax will emerge as the new public utility.

India Outlook: IDC Top 10 Predictions
India will continue to be the fastest-growing domestic IT market in the AP region in 2006, forecasted IDC in its recent report on the Indian IT market. It has also predicted that 2006 would be the year of digital home revolution in India.

New Opportunities: Animation & Gaming
Animation & Gaming is an opportunity worth $1.25 billion for India. This is the conclusion of the latest report on Animation and Gaming industry in India by NASSCOM, 900-member industry body representative of India's information technology companies.

TMT Radar
NASSCOM has launched National Skill Registry (NSR), the first initiative of its kind in the world, to create a nation-wide database of Indian Information Technology (IT) professionals. It will help the companies to hire professionals with a clean record to ensure data security. Under the scheme, resume of the professional opting to register with NSR will be verified by NASSCOM at the time of registry, so that a company willing to hire the person will not have to do the exercise on its own.

Policy Watch
Several Indian states are competing against each other to offer more and more incentives to IT companies to attract new projects of IT companies. Kerala has allotted 50 acres of land to Infosys in the new Special Economic Zone (SEZ) in the state capital of Thiruvanantpuram. And of course, the race between Karnataka vs Andhra Pradesh continues, as Andhra Pradesh government is considering promoting 7-8 SEZs exclusively for IT and It Enabled Services.

Corporate Monitor
Hardware manufacturing is gaining pace in India. Dell Computers, the largest computer maker of the world is considering to set up a manufacturing unit in India. SemIndia, a company formed by non-resident Indian IT professionals turned entrepreneurs that announced setting up a chip-plant by partnering with AMD, has announced another project of Assembly-Test-Mark-Pack (ATMP) plant in India, with $75 million investment in the first phase. The trend of Indian telecom companies outsourcing their network operations got stronger with Hutch-Essar selecting Nokia for maintaining their GSM mobile network in a $350 million deal.

Sector Focus: Resurging FM Radio
The FM Radio market in India is set to explode from 22 FM stations in 12 cities to 300 stations in 91 cities across the country. The Government of India has just concluded the five rounds of bidding for 10-year FM Radio licenses. The Indus View estimates that the market of FM Radio in India will grow to $125 million in 2010 from $25 million in 2005.

Sector Focus: Q3 Financial Results of IT Sector
The top-4 companies of the IT sector maintained a high growth in the third quarter. While Tata Consultancy Services (TCS) and Infosys Technologies posted results in line with market expectations, Wipro and Satyam Computer Services came with outstanding numbers way ahead of what analysts had predicted.

Company Watch: HCL Technologies
Moving from the status of “distant fifth” largest IT company to a member of “the big league of Top-5” IT companies of India seems to be the immediate target of HCL Technologies. It recently won a $330 million outsourcing deal from the top UK consumer-electronics retailer DSG international Plc, which is claimed to be the largest outsourcing deal for any Indian IT company.

People Watch: Azim Premji
The man who transformed the Wipro from a small vegetable oil company to $1.35 billion IT company had to come back to the driving seat of the company last August at the age when people opt for a retired life. After the exit of Wipro Vice-chairman and CEO Vivek Paul, Chairman Azim Premji resumed the role of executive head again, though without officially becoming the CEO. And the latest financial results of Wipro tell us why he is one of the most admired persons of the Indian IT industry.

Market Watch: Sensex Surpasses Highs of 2005; Crosses 10,000 in February
Sensex, the benchmark index of the Bombay Stock Exchange (BSE), reached the 10,000 mark for the first time on February 06, 2006 after playing hide and seek with this mark in the last week of January. Even at these high levels, the buying support from the Foreign Institutional Investors (FIIs) continues as earlier.

Indus View advises multinational companies on business opportunities emanating from India’s fast growing economy. It de-risks the growth ambitions of multinational companies operating as a trusted partner that understands the complexities of the Indian market and the commercial drivers of western enterprises.

IndusView provides strategic insight, competitive intelligence, research and execution capabilities to manage large vendor and corporate finance transactions. More at