INFY and the present Economic Scenario.

INFY
INFOSYS' results were out yesterday and the stock crashed by around 20%, biggest intra-day fall in a decade. INFY has around 7.6 %( Source- www.nseindia.com, March 28th 2013) weightage in Nifty, it pulled the Sensex down by 300 points and Nifty down by 65 points. ITC which has a 9.29% weightage in Nifty was up by 3.5%, else the indices would have fallen further. Falling topline growth, billing pressures, margin erosion are the reasons for this dismal performance. But the fall to the tune of 20% is not expected out of INFY as the stock positively surprised everyone in the previous quarter. This suggests that the kind of growth in the previous quarter is not sustainable. In the year 2011, one of my friend who happens to be a big-time trader (He holds several degrees in finance and worked for few pink papers and business channels) in the Stock Markets told me, if a company shows more ‘other income’ than the previous quarter/year and if they still cannot beat the estimates or show better results, the stock should be dumped. Incidentally the other income of INFY is higher and still they cannot meet the estimated growth. No EPS guidance from a company like INFY is another shocker. Investors, traders, analysts are looking out for the guidance from the other IT majors especially TCS to see whether this dismal growth is sector specific or company specific. The less aggressive top management is another reason to blame for the poor performance. INFY no longer has the first mover advantage as companies like Wipro, TCS, IBM, Accenture, HCL Tech., have started pricing their projects aggressively. It lost out to HCL when it planned to acquire Axon Technologies few years back. Not only Axon, INFY lost few other bids in its plan to acquire other companies. With double digit inflation in India, freezing salary hike last year played havoc and when the attrition started increasing they had to change their policy. The global economic scenario is not favorable either. With the Eurozone reeling under crisis and the less spending of companies both from Eurozone and US had taken a toll in the Indian IT sector.


Gold
In India, the total Gold import per year is around 820 tons. For the year 2012, it was around 860 tons. This doesn't include the smuggled Gold into the nation. In the budget, traders and analysts expected the Government to hike the import duty on Gold but Gold was spared. If the current account deficit is uncontrollable the Government may impose more duty on Gold imports. Gold imports are a major contributor to the current account deficit. One troy ounce (1 Troy Ounce= 31.1034768 grams) of Gold in the International Market is trading around 1550$ and is expected to decline to 1400$. If the Gold imports are lesser this fiscal, this would help the Rupee to appreciate against the US dollar and help narrow the current account deficit too. As the demand from India and the demand from Eurozone has been declining it is highly likely that one Troy of ounce of Gold may hit 1400$ soon.

Rupee
FIIs (Foreign Institutional Investors) have invested around 26 Billion Dollars in the Indian Stock Markets and they were selling in India and were moving the money to Japan and the USA. Meanwhile US stock markets are trading near life time highs and the Government is presently purchasing bonds worth 80 Billion Dollars every month. This releases huge cash into the economy through the banks and they may soon stop this Quantitative easing. The Yen carry trades which is not attractive in the recent past may become attractive again as the BoJ (Bank of Japan) has started easing the monetary policy. This has attracted more money into the Japanese markets. As the Yen declines, it is good for the exporters. In India, meanwhile the Rupee declined in the year 2012 and it was the third worst performing currency in Asia. It had hit a low of 57.32 per dollar in the month of June 2012. Indian Government under the new Finance Minister has recently liberalized the foreign investments in the Indian G-Secs and Corporate bonds (Source- Ministry of Finance). This would encourage the capital inflow in to the country and eventually Rupee would appreciate against the US dollar. Allowing FDI is another important policy measure which will have a huge impact in the economy and on the Rupee in the medium to long term. The Government which was earlier blamed for having a policy paralysis seems to have finally woken up. Few foreign carriers are already in discussions with Indian airliners after the FDI norms in aviation were relaxed.

Some analysts whom I spoke to believe that Indian Rupee may reach 59 to a US dollar by year end. I beg to differ from their views. I feel we would be trading at Rs.50 or even less to a dollar by year end. If INFY posts a decline in net profit and shocking revenue guidance when the Rupee is reeling around 55 levels against US dollar, I am sure INFY and the other IT companies will struggle if the Rupee appreciates against the US dollar. The pressure to retain talent and YoY salary hikes to match the inflationary figures are going to be tough. When a company advises the investors about growing at 1.5% QoQ, I wonder what would run in the minds of the employees. Forget about double digit salary hike YoY, would they even be enojoying the current benifits or will they lose the battle to the demon called "Cost cutting". Though the present situation is grim,analysts expect the company to surprise the markets positively like it did in the previous quarter if the circumstances are favorable again.

GDP, Unemployment and Okun's law

Is there a relation between GDP and unemployment?. I hope most of you are working with an established corporate unlike me who always chooses the path less taken. Jokes apart, the job market across the World is not so good. Hope you heard about Boeing's plans to layoff 800 Commercial Jet workers and few companies in India related to the Automobile Industry have reduced the working days to cut the production. And for the first time since its launch in 2004, Maruti Swift which used to have a waiting period of 3 months - 6 months is available off the shelf and with a hefty discount too. And most of the companies are talking about lay-offs and production cuts. Employees are asked to take a cut in the salary or asked to have paid holidays (only half the salary will be paid in this period).

The picture is not rosy. But is this only for the manufacturing or for the Auto sector? No. If you remember a week back, candidates who got campus offers from HCL Technologies were protesting outside the company's offices across India as they have not received any announcement on the formal joining dates. These guys have passed out in 2012 and the next batch will be out in a month or so. A cousin brother of mine says, "Bro, I should have opted for Mechanical Engineering like you. I made a mistake by choosing Computers. I cannot fit into any industry wherein Mechanical engineers are being inducted in IT too." But when the economy is not doing well, it is not about IT or manufacturing, every sector will not do well. It is always the other way round, when most of the sectors are not doing well, the economy in turn will not do well. The Indian IT industry grew so well in a short span of time as it was fueled by cheap availability of skilled labour. But, this is not an advantage anymore as the labour is not cheaply available. In any Indian IT company about 30% of employees would be on bench at any given point of time. TCS has more employee utilization (72%) compared to the other companies. They plan to increase the employee utilization by few percentage. INFOSYS on the other hand hired 80% less employees in the December quarter compared to the previous quarter. The percentage of campus recruitment is very low for all the companies in the Indian IT sector. Before writing this article, I thought of talking to a friend who is working with the IT industry. He is a Senior Manager with a foreign Bank. He is with the software division of the Bank. I called him to ask about the situation in the IT industry. The irony is he has to sack 30 employees by this weekend. The total employee count in his division is 120. And that is 25%. The situation is grim.

Mushrooming engineering colleges led to a minimum of one engineer for every family or in other words, every family (Middle class) has one guy studying in an engineering college at a given point of time hoping to be hired by an IT company. Do not know, whether our economy can afford to employ all these people who pass out of these colleges. The quality of education is at a historical low. Large number of freshers sans quality will make our country a Banana Republic. Be prepared for more protests by students, unemployed youths, law and order issues. If you're a street smart entrepreneur, I am sure, now you would be thinking of ideas to encash this wonderful opportunity. If you have got one, kindly buzz me, I have got few up my sleeve too.

Now to the analysis part, is there a relation between unemployment and GDP? Yes, there exists a relationship. Okun's law or "Okun's rule of thumb" says there exists an relationship between GDP and Unemployment. Before getting into the law, let me tell you where we stand as a country in GDP. The GDP forecast of our country has been reduced to 5% from the earlier 8.5%. This amounts to a 40% reduction. Now let us get back to Okun's law. No point in making Arthur Melvin Okun wait. What the law states is, for every additional 1% increase in unemployment a country's GDP will fall by 2% compared to the potential GDP. If the GDP forecast is reduced by 40% then the unemployment rate prevailing in our nation is around 20%. There may be other factors contributing to a less GDP too. Ceteris paribus, unemployment is around 20%. Can you believe that? I am sure you're shockingly surprised as me. God save our economy!

Disclaimer- The Unemployment calculation is a theoretical one and is based on Okun's law. There may/may not be a similarity to the actual unemployment rates.