Focus on software as shares consolidate

By Anantharaman Muralikumar

MUMBAI: Equity analysts and fund managers expect software stocks to stay in favour as shares consolidate their gains this week, but a further drop in the rupee or a hike in oil prices could stir up markets. "The markets are likely to stabilise at these levels with activity remaining stock-specific," said Satish Menon, senior vice-president at Geojit Securities. "But, things could change if the rupee falls more or the government raises oil prices."

The benchmark 30-share Bombay Stock Exchange index gained 1.6 per cent, or 70 points, last week to end Friday at 4,416.86. The index is up 3.2 per cent in August but is still down 28 per cent from its all-time peak of 6,150.69 in mid-February.

The recent gains were almost entirely on the back of investor buying of software shares, with the representative sector index rising nine per cent to 3,714 points for the week. Dealers felt a looming oil price hike would hurt "old economy" companies, prompting investors to switch into technology firms, which are immune to higher fuel prices.

The sector stayed high on investors' buy lists as its fundamentals are sound and being export-oriented, it is also seen benefiting from the dip in the rupee.

"Software once again looks good. There is still a lot of steam left in the rally," said Ajay Srinivasan, managing director at Prudential ICICI Asset Management Company. "Foreign funds are buying, outstandings are down and the Nasdaq has also stabilised. The markets have seen the bottom and should start rising," he said.

The Nasdaq composite index ended Friday down 0.26 per cent at 4,042.68 points on profit-taking after substantial gains for software, telecom and chip makers in recent sessions. India's market regulator says foreign funds have bought a net $341.3 million worth of equities in the period from August 1 to 24, against nearly $550 million in June and July.

"They are buying into the index-based software stocks like Infosys, Satyam and NIIT and these should appreciate by about 10 to 15 per cent in the coming weeks, which should help boost the market as a whole," said K. Sivakumar, research head at Cholamandalam Securities Ltd in Madras.

"Once the resistance of 4,460 (points) is breached I see a rally of up to 4,600 and the next point would be 4,900." Merrill Lynch last week raised its earnings estimates for Infosys and forecast higher margins for information technology firm Wipro Ltd in the year to March 2001 on the back of strong order flows. The rupee, which ended on Friday at 45.845/855 per dollar, has fallen 1.8 percent in August and more than five per cent in calendar 2000.

Some analysts took a contrarian view. Gul Tekchandani, chief investment officer at Sun F&C Asset Management India Ltd., said "old economy" shares might come back into the reckoning in the short-term as an oil price hike had been discounted and software shares faced profit-booking.

India has said it is watching international oil prices before deciding whether to raise domestic oil prices. "Sectors to watch would be cement, pharmaceuticals and fast moving consumer goods as money shifts out of software," Tekchandani said. Indian stock exchanges are shut on Friday for a Hindu festival.

(C) Reuters Limited 2000.