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Finance Friday : Infosys Results , Industrial Index, Rising Inflation

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Infosys Quarter Results Beat Industry Estimates , raises Revenue Guidance

The year has started on a promising note as far as financial numbers are considered.Infosys, the IT bellwether beat delivered better then expected third quarter results which bought a short term cheer to the Indian Stock Markets.

Infosys reported a 2.7% rise in consolidated net profit for the third quarter ended December 31, 2009 (Q3FY10) at Rs 1,582 crore when compared with Rs 1,540 crore in the previous quarter of the current fiscal (Q2FY10)

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The Indian Stock Markets especially the BSE IT index rejoiced and rose 3.84 per cent to a 52-week high of 5410.9 on Wednesday after the results were announced.The numbers reported were significant for various reasons.The Third quarter has lesser working days and the rupee has been appreciating quite a bit against the dollar.Other IT stocks like TCS, WIPRO rose quite a bit.

However, Infosys which is considered a trendsetter has also raised it revenue guidance for the year 2010.The guidance is cautious yet signifies that the worse might be over for the IT sector in India.

The company expects revenue growth of 3.6-3.8% for FY10 and 1.8-2% in dollar terms on a annual basis. Infosys has also raised the EPS( Earnings Per Share) to 107 from 100 for FY10.So much so, that the industry analysts are betting on 18 to 20% growth for 2011 fiscal.

What are your thoughts on the IT stocks after the Infosys quarter results? Do you think that other IT giants will report positive numbers and boost the Sensex?

You may also want to help Arun with your Stock Market predictions for 2010

The market outlooks looks positive but there are other factors which might play spoil sport in seeing a strong market going forward.More details later in the post.

Industry Production at two year high, Food Inflation continues to rise

That’s one good and bad news rolled into one :-) Industrial Production Index(IIP) touched a 2 year high at 11.7% for November.This is an upbeat news and signifies that the economic recovery is well on course.The consumer durables sector was the top performer with a stupendous 37% growth. The Fiscal Stimulus provided by the government in the form of lower excise duty,service tax etc. has seemed to help the CPG and the manufacturing sector by increasing the demand.

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This also suggests that the stimulus may not be taken away too soon as the government has been speculating.Government has seen the benefits of the stimulus in the form of promising IIP numbers but the finance ministries problems seem far from over.

WPI Inflation rose up to 7.3% for the month of December which is way ahead from Government’s expectation.The sharp rise from 4.78% in November presents a worrisome picture.The surprising increase might see the RBI tightening the fiscal policies which were relaxed to a great extent last year in the wake of a slowdown.The government had predicted a 6-6.5% rate of Inflation by March, whereas the December figures have beaten their estimates well in advance.

The finance minister had been hinting at taking some stern measure by tightening the monetary policies.Rate hikes seem to be inevitable now with an immediate increase in CRR rates as per the industry analysts.This might put the government into a Catch-22 inflation situation where the industrial sector is expecting the existing rates to stay to ensure that the country remains steady on its path to economic recovery.

Now, that’s some situation the finance department will have to handle. Fiscal stimulus and relaxed rates seemed to have helped India chalk out a path to recovery,but for the industrial sector to stay on course, any changes to the existing scenario might prove a big hurdle.However, the rising inflation is one monster which if not tamed early might turn into a catastrophically huge problem later.

What is your take? Do you think the government should continue with the stimulus and rate cuts to help the industrial sector or a rate hike is inevitable to control the inflation?

  1. Vishal Sanjay says

    Ankit and Madhav I completely agree with you guys, but you see the lifestyles of an Indian and a japanese is totally different, now 75% of the people who retired 10 – 20 years ago in India would mostly not have a pension plan (as only government employees had one back then) and they would take their kids support to live, and the rest of the old age men were either very rich or are still working in hard labor jobs. Most of the middle class and the upper middle class people of india will only feel their savings drained and will not feel the real heat, this is mainly because most Indians aren’t consumerists and on an average Indians save 13% of their monthly income.

    Its well and good if the inflation stays within 6% to 8% and even if it goes beyond 12% it will reduce due to the shortfall in demand.

    I don’t mean to encourage the current inflation, I’m just disagreeing that this inflation can change the consumers standard of living. None of the classes of the Indian society are much affected with an inflation like this.

    I’m sure you won’t understand this idea too Ankit!! You see there aren’t many people who agree with my views, gotta bare with me :)

    1. Ankit says

      Vishal, Appreciate your thoughts but then i am ready to go as far it takes to understand you:-)

      You mention “most Indians aren’t consumerists ” and lose money. Please explain then who is the consumer:-) We are talking bout something as basic as Food which i hope you will agree, that every Indian is a cosumer.

      You again mention that “indians save 13% of their income”. I am not sure whats the source but lets consdier it true for a moment.
      This 13% isnt adjusted against inflation is it? Cos if it aint, imagine the consequence of rising inflation. A 1% rise in WPI inflation could atleast have a 50 basis points reduction in the savings!!
      Game for more discussions as long as they take us somehwere and help me state the importance of Inflation on the economic status of an individual:-)
      May be Madhav will chip in too

      1. Madhav Shivpuri says

        Pass :-)

        1. Ankit says

          lol!! that was a little confusing… do i atleast have ur agreement with what i wrote:-)

        2. Madhav Shivpuri says

          Yeah… we both have agreed with one another and I have hardly any more valuable comments to add at this stage. That’s why I passed it. Will get back in the fray if Vishal would brings up some interesting angle.

          I think Vishal’s mention of the saving’s rate (13%) is in the ballpark of what I came across recently.

          By the way, due to your thought provoking post and ensuing discussion, I realized that I need to study economics (being a comp. grad) and so ordered a book on the subject. Hope to be knowledgable next time around!

      2. Vishal Sanjay says

        You see Ankit I used consumerism not for food products but for raw goods, consumerism actually means the personal happiness one gets to consume things. India is still a survivalist country. When a product gets too expensive people in India stop buying it which causes a fall in demand leading to a fall in price, unlike people in USA and Japan where people get into credit to buy expensive products.

        Now the savings report was read by me previously when the inflation was at 12%, the common man in India doesn’t organize his expenses, so let his savings be 1% or 13% it makes no difference to him. Last time when the inflation rate went up to 13%, many restaurants started increasing their prices by almost 20%, but this didn’t affect their customer volume.

        Above I just wanted to tell that Indian consumers won’t waste money on consumerist activity, but instead they spend without restriction on food, that is why food inflation kept increasing even when the other markets were deflating.This is a really good attitude of the Indian consumer.

        That is why people say that economics is a study of man’s greed :) Hope your satisfied with this Ankit.

  2. Ankit says

    Awesome!!! BTW the post was may be thought provoking but my knowledge in economics and finance is nada-zero-zilch :-) Learning as i go and Arun got tricked into beleving my financial prowess seeing my finance blog..lol.. I am more of ‘How to Suck at finance/Stock markets’ guy:-)

    Do share your reading list sometime.I have bought ‘How to think like Benjamin graham and invest like Buffet” but yet to start reading it

    1. Vishal Sanjay says

      The best book for you to learn about finance is the Rich Dad Poor Dad series, thats the main reason I started to earn money at a young age. Read that its good.

  3. Madhav Shivpuri says

    Vishal, I respectfully disagree that inflation does not affect one’s economic status. People who retired 10-20 yrs ago on a pension of Rs.5000, today cannot make ends meet. What seemed to be a reasonable retirement kitty is constantly eroded due to inflation. Food prices are nearly 20% higher since last year, and probably nearly doubled in the last decade. Without proportional increase in income inflation diminishes one’s purchasing power.

    As an aside, in countries like Japan where it has a large greying population, despite many of them relying on their pension for retirement income, life is not as hard as India. The reason is that food prices have not risen in a decade; on the contrary they have reduced due to deflation – a term hardly known outside Japan. Prices since the Japan bubble in late 80’s have doggedly headed south without any sign’s of change. Also, the government provides for social security thereby the onus is less on the individual and more on the govt. As you know, in one’s old age medical care is a big expense. Therefore despite retiring on an average pension, one can maintain one’s lifestyle for a longer period compared to India.

    I look forward to some healthy discussion on this from all Trak readers.

    1. Ankit says

      Completely agree with you madhav!! Inflation is critical aspect in assesing economic/financial viabilty.As rightly pointed out by you, it is indespensible in the Indian Economy where Social Security aint available.
      When i see inflation reducing the buying power of every penny that i make, it sure changes my finances.
      Specially for something like Food, there is almost no regulation atleast for middle class who has to buy it from the market and not ration stores.So, a staggering food inflation rate makes my life difficult.
      Hell, it is the rising inflation which makes investments in Govt Bonds,FD’s a mockery.With a 8% Interest and a close to 7% average rate of inflation, effectivley i dont make anything out of parking my money for a long time.

      Vishal- I sure do not understand your ideas.Yes, the poor gets it a subsidized price.But with increasing price and below average output(production), it creates a problem and puts the burden on the government budget.Also, it is the middle class who gets severly affected with the rising inflation.Moreover, banning exports and reducing import duties aint that easy.The government has already eased import/export policies and further ammends could seveyly imabalance the trade ecosystem.
      Hence, i said that it aint gonna be easy for the government to ensure a steady growth momentum :-)

  4. Madhav Shivpuri says

    I don’t think that the worst for the markets is over – especially for those industries or companies that depend on exports. Some companies who have been able to generate reasonable revenues or profits in the last couple of quarters might be loosening their belt just a bit, but I do not expect this to be the beginning of the next bull run. We probably need to wait till past Jun or Sep qtr to take such a view. In the mean time people probably need to be cautious on the spending front.

    Inflation should be worry for both short and long term. Short term prices impact immediate spending abilities while over the long term this impacts the purchasing power of one’s savings and retirement income (pension). So, the citizen’s financial status will decrease and they will move from upper-middle class to middle class, and then to lower-middle class etc. Inflation will also have the effect of consumers not being able to afford non-essential stuff (luxury brands, real estate, cars etc.) and this in turn will again hurt the economy through loss of sales leading to loss of jobs etc – a downward spiral.

    The govt. has to react sooner than later to suck out the liquidity in the markets to reign in the inflation; this could very soon happen in the form of the fiscal stimulus withdrawal from the economy. One alternative to withdrawing stimulus funds is to issue govt. bonds and use it for infrastructure funding. The govt. is selling part of its stake in PSU’s which could have a similar effect to bond issuance. The budget is the key.

    1. Vishal Sanjay says

      Madhav I know that inflation is a major issue, but its not going to reduce a citizens status unless the inflation goes as high as Zimbabwe’s. Common mans savings will reduce, but its not going to affect their standard of living. The inflation will be like paradise in the rural areas, but some of the urban poor is going to get affected, not all as some states like Karnataka gives poor people essential products at a 75% concession. And the budget is not going to have any affect on the inflation, the key lies only in reducing import duties and banning exports of certain products.

    2. Ankit says

      Madhav,

      Agree that the worst is not over for the markets.Cautious approach is the only way forward.The numbers(IIP,Quarter results) are promising but then inflation,strengthening rupee are all a cause of concern.The US economy is yet to come out of the rut but the forecasts by garnter,forrester all point towards increased spending which should reflect in good revenues for the IT sector.
      Moreover, with the successful listing of IPO’s like Cox&Kings,Godrej etc, the positive optimism is returning to the market.
      So, things are getting better but yes, for a sustainaible bull, it is gonna need more stability and investor optimisim.
      Food Inflation is eating into the savings of the retail investor like anything.

  5. Vishal Sanjay says

    The IT industry is going to have a tough time as the falling dollar is cutting through its margins, Infosys managed to grow by managing its cash reserves, but I heard that they are cutting on their employee orientation causing ire from their employs.

    While the stimulus is concerned I feel the government is going to stop in the next 6 months as the government doesn’t have the financial muscle. The stimulus played an important role in the economic recovery, so it should be stopped cautiously or else it may reduce our growth suddenly.

    The inflation was not a concern all this while as the government thought that it could help the farmers, but now its seriously disturbing the urban poor. Many economists say that its very difficult to get high growth and low inflation, but the inflation may come down after the stimulus is stopped. Maybe we can reduce prices by removing import duties o food products and banning exports of some products.

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