Infosys "Constant Currency" Q3 results!

I don't have anything against Infosys. This is an objective assessment of what was stated by the Infosys Board members on CNBC TV18 telecasted discussion of the Q3 results.

Along with millions of investors, IT employees, etc I watched the Infosys Q3 results discussion with the highly regarded Infosys Board; with presenters Udayan and Mitali a few days back. My view is that Infosys revenues fell during Q3. Infosys fired a large number of people and asked a large number of people on site to go on loss of pay leave. This reduced their outflow on salaries. The USD/INR exchange rate improved the company's margins. Overall, revenues fell in all geographies when measured in the same currency against previous quarter numbers. Margins improved because of a stronger dollar, and because of the culling of the bench. Infosys didn't do anything miraculous in terms of their business process to improve their margins dramatically.

The outlook for CY 2009 is truly dire. A lot of clients are on the verge of bankruptcy filing. There's little chance of any new projects coming Infosys's way. It's a volatile currency world. Infosys just has an unsophisticated foreign currency receivable hedging process, in which they mainly use non deliverable currency forward contracts, like a commodity export/import business. There was really nothing objective to cheer about in the Q3 results. Yet the stock price rose after the Board's TV discussion of the Q3 results.

At the Q3 results discussion the "constant currency" reasoning was presented by the Board.

While discussing revenues, the Board asked investors to take the view that there wasn't much decline in "underlying business volume" because you have to allow for the currency fluctuation. For instance revenues from the UK and Europe showed up lower when measured in USD because the US dollar strengthened against the GBP and EUR.

While discussing margins and net profits, one Board member stated that Infosys has a model which helps them to retain high margins even when the utilization is lower. The current crisis is a test of the model, he indicated.

I don't think there is any such model which can defy basic arithmetic. The viewer was supposed to accept the revenue as ok, as not having declined much, in "constant currency" terms. While looking at margins and net profit, the Infosys Board didn't apply their constant currency argument.

The good margins weren't because of a strengthening dollar, according to the Infosys Board. Infosys has a secret model that nobody has heard of. The model helps them to make high margins even when they have fewer people working on projects.:-)

Sold Satyam @ Rs. 36.45 on Jan 12

I didn't make any posts since Jan 12. On Jan 12, in the afternoon after lunch I noticed that Satyam had gone up to around Rs. 36.50. I sold it on instinct. I had previously exited my Nifty shorts as I mentioned somehwere else. Since the 12th I haven't done any trades.
I was bearish on the Nifty for the January series. I exited all my shorts the day of the Satyam Panic and after that I went long in Satyam delivery, stayed on for one trading day with a weekend in between and sold off the Satyam shares.
I've had a lot of difficulty taking a view on the Nifty since the day of the Satyam Panic.

No view on Nifty this morning

I closed out my Nifty shorts in the wake of the Satyam panic and bought Satyam at Rs. 21.05. Today I have no view to offer on the Nifty.
It's the third anniversary of my late father's passing away today.

Satyameva Jayatey Part I: Fresh Unanticipated Panic Breaks out on the Nifty

A word on the title for international readers. The word 'Satyam' means 'Truth' in ancient Sanskrit and the phrase 'Satyameva Jayatey' means 'Let the Truth Triumph', approximately.
At this writing there are few round numbers to report. Nifty is trading at around 2950 levels, down around 162 points from its previous close. Satyam Computers Ltd. is trading at around Rs.50, which is around 76% down from its close yesterday.
Mr. Ramalinga Raju, the principal promoter and outgoing Chairman of the Satyam Board, this morning resigned from the Company's Board and wrote this:
a resignation letter for the history books.
Update: I was going to continue to write about the letter and so on but I have some useful information for investors on the Satyam so I'm moving on to Part II now instead. There's a lot of information available on the Satyam numbers elsewhere.


revealed with deep regret that The Company's Balance Sheet as of September 30, 2008 contains:
1) a) $ 1050 million of inflated (non-existent) cash and bank balance as against $ 1117 million reflected in the books.
b) An accrued interest of $ 78.33 million which is non existent
c) An understated liability of $ 256.25 million on account of 'funds arranged by Mr. Raju'
2) An overstated debtor position of $ 102.08 as against $ 533.54 million reflected in the books.
To be continued ...

Fog around the Santa Claus Rally

Why is it hard to predict the Nifty level over a period of say one month or so?

On Nov 20 2008, Nifty was at a trough of around 2500. By Jan 05, it closed at 3100 plus. This post tries to explain the reasons for what’s commonly been called the December 2008 Santa Claus Nifty Rally. (During this time visibility was very low in Delhi and several flights were cancelled due to dense fog). FII and DII turnover was at very low levels. Overall market turnover dropped precipitously during the holiday season, though the market continued to rally. Several commentators have mentioned that the December 2008 rally was led by high net individuals (HNI s) and retail investors.
Let’s examine this in its wider context and try to understand what’s really happening. You will observe the following typical sequence in the stock market. The economy is booming. Unemployment is at historical lows. Consumption is strong. Credit is flowing freely. Productivity is increasing. There are no major wars or conflicts. The stock market suddenly undergoes a precipitous fall. Various sectors decline. You get bears coming on TV and giving meaningless reasons why the market is considered to be “overvalued” and predicting a dire correction. After some time the market goes up again, and reaches ever higher levels. This behavior is called as an “intermediate downtrend in a bull market”.
Similarly you’ve observed several rallies since January 2008. The economy is down. People are dependent on government stimulus spending to make profits. Credit is frozen. Unemployment is at historic highs. The market suddenly goes up 20% or more in a month. This completely funny behavior of the stock market is called as “an intermediate uptrend in a bear market” or simply as a “bear market rally”.
Technical analysis textbooks will tell you that these “intermediate trends” last anywhere from 3 weeks to 3 months. The corrections are usually shorter and sharper than the rallies. So far I’ve never actually come across a believable and consistent explanation as to what causes these intermediate trends.
Of course there are many theories about it, from the Elliott Wave theory to the Random Walk Hypothesis, to the Business Cycle theory, stretching across the various areas of technical analysis, capital market theory and macroeconomics. None of the theories have genuine predictive value and none of them suggest ways and means to remedy this problem.
The reason for these trends might very well be what is known as “operator play”. A stock market operator is a participant who has access to a large amount of capital, usually in the form of short term credit. This participant is able to manipulate and influence prices in a particular counter and segment. Typically the influence on prices is aided by misinformation campaigns which create increased speculative interest in the counter.
Observation of the December 2008 rally appears to indicate significantly high levels of operator play in various counters.
This is why trying to predict the Nifty levels in a particular series using the traditional methods of technical analysis, fundamental equity analysis and macroeconomic analysis can be ineffective.

Nifty and the Global Economy

The global deleveraging process is still on. According to posts on the Calculated Risk blog, commercial real estate firms, retail chains, etc are facing significant financial problems both in the US and in the UK. On December 17, 2008 the Fed made an announcement revising the target fed funds rate to zero and indicating a policy of further monetary expansion through quantitative easing. The recent uptrend in global markets appears to be on the back of that announcement. Globally, Q3 earnings are going to be released and economic data hasn’t been encouraging since that announcement. After Obama’s inauguration on January 20, 2009 announcements regarding the US government stimulus package are expected. Global economies are in a recession and economic expansion can definitely not be expected during Calendar Year 2009.
Around 32% of India’s GDP comes from exports. Around 15% of that is merchandise exports. Export markets are severely affected by low levels of aggregate demand worldwide, apart from operational issues such as the availability of credit. Given the Q3 earnings releases in India and similar data on financial performance worldwide, all the news and cues from today onwards till January 20 can be expected to be bearish for the Nifty.

Q3 Earnings and the Nifty

Q3 Earnings and the Nifty:
Earnings releases are expected to begin later this week and early next week. Several analysts have an opinion that the expectations from the Q3 earnings are already priced into the Nifty.
Advance tax numbers have been released. Commercial vehicle sales data has been released. November trade data shows merchandise exports declining at a decreasing rate and non-oil imports increasing at a decreasing rate. Given the information already available there are several expectations related to Q3 earnings.
The auto sector, auto ancillaries, real estate, metals, etc are expected to show very bad results for Q3. The IT services sector will show severe topline weakness, combined with higher margins from layoffs of workers on bench and a stronger dollar; it’s possible that dollar hedges resulted in Treasury losses for them.
My opinion is that the earnings are not fully priced into the Nifty. Once the results are actually out, there will be a bearish impact on Nifty levels. Consider the example of how bullish news flow impacts the market. Before the Friday evening announcement of a second government stimulus package there were already expectations around it. The RBI’s 100 basis point cut in reverse repo rate to 4%, and 50 basis point cut in the Cash Reserve Ratio did act as a positive surprise for the market. At the same time, the real estate, infrastructure, exports, sectors were disappointed with the stimulus package and more was expected on those fronts. So the actual news was different from what was expected both ways. The market rallied yesterday with higher volumes on news of the stimulus package. My view is that the simpler story applies. Though the market was expecting bullish news, when that news was actually out; it rallied.
Today the market is adjusting to Q3 earnings expectations. Once the data is actually out, there will be a Nifty fall.
Given the technical analysis of the Nifty, that fall might take us below 2500 to the next trough, possibly to around 2200 levels.

Technical Analysis of the Nifty

The Nifty peak was around 6300 levels, in January 2008. The troughs were hit in October and once again on Nov 20 2008, at around 2500 levels. Between the October and November troughs the peak was at around 3150 levels. There’s been a up trend from November 20 onwards. Technical analysts believe that a bear market rally is one in which the successive peak is lower than the previous peak. So the technical view expressed, for instance, by Rajat K Bose is that unless the Nifty closes above the 3150 level at high volumes the current up trend should be viewed as a bear market rally. The other characteristic of a bear market rally is that it is followed by a sharp downtrend, in which the next trough is lower than the previous trough. Since the previous trough was around 2500, if the current uptrend were to break then the next trough is likely to be below 2500.
Technical analysts also measure volumes and market breadth. The Nifty rally all the way till yesterday (Dec 05) was marked by low volumes. Yesterday volumes were higher and the Nifty was up further from the Friday close.
Today’s view from Rajat Bose is that traders need to watch out for the 3045 level. Nifty has resistance at 3045 and if that is breached it could signal the start of an intermediate downtrend, which might possibly take the Nifty below 2500. Similarly it stands to reason that if the Nifty crosses 3150 levels at high volumes that would signal a reversal of the downtrend all the way since January 2008.

From Brad Setser's Analysis of China's Exports

My comment on Brad's post :
(I might be making some corrections/additions to this later)

I find Brad's analysis very interesting from an Indian market perspective. Thanks a lot Brad for your insightful post. The Nifty has rallied from its October low of around 2500 to around 3050 levels at this writing.Over the last 4 trading days volumes have been low (presumably affected by the holiday season) and the rally has proceeded in the range upwards from around 2810 to 3050 in these 4 days. The November trade data for the Indian economy is out. It shows a contraction of around 9% plus in merchandise exports in Nov 2009 and an increase of around 3%plus in non oil-imports. India's fiscal deficit and current account deficit are both widening and forex reserves are falling.Today the Govt. of India is expected to make an announcement regarding further stimulus programs after market hours. Speculation in the marketplace is around the following factors:1) The Govt. stimulus program is expected to be bullish.2) Earnings for the Sep-Dec Quarter will start to be announced around 10 days from now.This is expected to have a negative effect on market sentiment.3) Global cues are being closely watched. FII buying has begun in Dec 2008 after a selling trend throughout 2008. However, if you total up FII turnover from the previous trough onwards you get a negative total (i.e. more sales than purchases)Given your analysis that "the global environment is changing in ways that will make it harder for China to avoid a sharp downturn in its exports no matter what China does" I believe it applies to India's merchandise exports as well.Merchandise exports are around 15% of India's GDP and exports total up to around 32% of GDP overall. Your post reinforces my bearish outlook on the Nifty for the January series.At the same time you have to remember the recent rally on the Nifty has been led largely by HNIs and retail investors rather than institutional buying.The current bear market rally can either be artificially extended beyond the earnings season, or there could be a natural collapse to re - test the October lows of 2500.

Whither Nifty in January 2009?

In January Nifty is likely to make a break either upwards or downwards. Nifty is likely to test the October lows of 2500 if the move is downwards. If the move is upwards you could expect a trading range above 3250.
Technical Analysis shows a consolidation during the last 2 trading days of 2008 and today. This consolidation is below the previous peak of 3150, in the 2990 range. At this writing Nifty has risen above the 3000 mark and is trading at around 3030 levels.
One of the limitations of Technical Analysis is that it tends to show a movement once it has started rather than predict a movement before it starts.
My bias is a bearish one on the Nifty but at the same time I don't rule out a bear market rally in January 2009.