Sucheta Dalal :TCS results and lessons from the market
Sucheta Dalal

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TCS results and lessons from the market  

April 26, 2005

Last week's action and reaction in the capital market has many important lessons for investors

TCS results and lessons from the market


By Sucheta Dalal


Last week’s volatile action in the Indian stock market holds several important lessons for those who are yet to understand the changing dynamics and implications of India being a part of the global investment market. Let me run you through the various events that were worth noticing.

Let’s start with Friday April 15th when the Sensex fell 219 points. Infosys announced its results on April 14th and although the market darling surpassed analyst’s expectations, it caused market sentiment to nosedive by its poor profit guidance for the coming quarter. Infosys said that compliance issues in the US could slow down its business.

 Although April 14th was a holiday in India, the U.S. markets were open and the Infosys ADR collapsed seven per cent. Every trader worth his salt knew that we would witness a major sell off on Friday and Sensex opened with a 124-point downward gap and prices began to crumble all round. Being a part of the global market meant that U.S. investors got the first chance to set the price trend of India’s favourite company.

As prices went into a free fall here, television anchors began to paint a hysterical picture of doom, but it was more interesting to watch the reactions of retail investors polled by the business news channels. Barring the occasional exception, all of them exhibited touching faith in Infosys and were certain that the price would bounce back.  So much so that it was impossible to figure out whether they were putting on a brave face or if they genuinely planned to hold on to their shares irrespective of the broad market trend.

Well, Infosys has certainly done nothing to shake investors’ confidence, but a savvier investor would have been more conscious about the market dictum that says, “never fall in love with your stock”. Instead of worshipful adulation of a company and its promoters, smart investors ought to have been looking for a profit opportunity in selling immediately and buying the stock back after a decline.

If Friday was a day of panic, Monday saw a continued downtrend. That was a direct consequence of the global scenario where major markets in the world – Asia, Australia and Europe saw a virtual meltdown. This was accompanied by heavy net selling of about Rs 500 crore everyday by Foreign Institutional Investors (FIIs), who are the single biggest investors in the Indian market today. FIIs have been selling heavily all through this week too, barring probably Thursday, where the numbers are not available at the time of going to press.

In the midst of this, Tata Consultancy Services (TCS) announced its maiden full year results as a listed company. Investors have waited for a over a decade for TCS to go public and it had made a suitably spectacular debut. The company was cearly aware of the importance of the occasion and high investor expectations when it chose to hire a five star venue to announce its results at a press conference. But then, the media as well as the investors were in for a jolt.

TCS’s results were so shockingly below expectations the stock collapsed even as television anchors desperately hoped that the poor numbers would be redeemed by some extraordinary items of expenditure. Nothing of that sort was known to investors – at least not until markets closed on the day of the results. So the stock fell 8.8 per cent.

After closing hours, there was more bad news. Profits were even worse than they had first appeared and investors learnt that the company didn’t even have the good sense to structure their accounts wisely. For instance, a host of employee incentives, which are a recurring expenditure, were bunched together in the last quarter instead of being distributed over all four. It was also clear that although TCS had done well in the past, it was growing much slower than its two blue chip rivals Infosys and Wipro.

Worse, TCS seemed blissfully unaware about the need to pay attention to market expectations. In their television interviews, top management insisted that they were doing fine --- the stock fell another 7.7 per cent on the day after the results, even though the market had bounced back.

But TCS failed to understand. It called a second breakfast meeting with select journalists and media reports that quoted the Managing Director as saying,  “It is not a shock (the results)”. The company also refuses to give any guidance about the future.

None of this would have mattered in a strong bull run. The global markets are shaky, the dollar is weak, and investment gurus such as Mark Faber are talking about higher interest rates and possible stagflation of the U.S. economy.

Indian investors and corporate honchos will both have to learn that they are now operating in this global environment everyday, where a few television interviews will not talk up a stock in the midst of a global meltdown. It is a reality that they have to live with.

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-- Sucheta Dalal