It couldn't have come at a worse time for the Indian stock markets, which have already been weighed down by the US-Iraq war. Technology bellwether Infosys set its earnings growth target at 11-12 per cent against the market expectations of over 20 per cent. Though the company met its revenue estimates for the fiscal gone by, the stock crashed 26 per cent on Thursday, taking the Sensex with it, which was down 3.37 per cent. In the past one year this has been the highest one-day fall for the index. At the time of writing, the Infosys stock had shed another 18 per cent. All this makes one wonder whether technology investors' infallible belief that software still continues to be a high growth sector is justified or not.
For all the 89 equity funds that own Infosys, it was a near catastrophe. On an average, these funds' net asset value (NAV) saw 3.16 per cent erosion in a single day. In other words, all the funds put together—who have invested Rs 561 crore in Infosys—lost almost Rs 145 crore in a single day.
The maximum carnage was seen across the 12 technology funds, which fell like nine pins as Infy is their principle holding. These funds clocked a sharp 10-16 per cent fall in their NAVs on Thursday. The biggest loser in this category was Franklin India Infotech, which has a whopping 34 per cent exposure to Infy. Another big loser was K-Tech—it has 30 per cent of its assets parked in Infosys—which was down 14.80 per cent. However, the woes of technology funds didn't end with Infosys. Another IT company, Mastek, fell almost 50 per cent as the company lowered its sales and profit target for next year. The stock figures in seven technology funds' portfolio.
However, it wasn't that bad for diversified equity funds. Of the 70 funds, 30 of them—which had Infosys—saw NAV erosion of an average 2.24 per cent. The worst hit in this category was Tata Life Sciences, which was down 7.16 per cent. While this fund had reduced its Infosys exposure, its top holding, Mastek, saw the fund's returns tumble. Sun F&C Value (with a 10 per cent exposure in Infosys) was also hurt badly, losing 4.39 per cent.
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For Infosys, a single-day loss of 26 per cent has been the highest in the stock's history. The previous highest fall happened in April 2001, when the scrip lost 16 per cent on account of its revenue projections. At that time most fund managers were still upbeat and were expecting a 35-40 per cent growth from Infosys. As many as 91 equity funds had invested around Rs 1,370 crore in the stock (as on February 28, 2001).
Things seem to have changed now. Caution has replaced high optimism. Infosys' earnings grew by 29.6 per cent in 2001-02 and in 2002-03, it grew by 26.4 per cent. The stock seems to have lost the fund manager's fancy too. In March 2002, 68 equity funds had together held 11 lakh shares in Infy. In March 2003, the aggregate number of shares held by the same set of funds has come down to 9 lakh.
Despite all this, there is no doubt that Infosys still continues to hold a pride of place in the software industry. However, with profit guidance as low as that of old economy sectors, the stock may lose its charm for equity funds. Moreover, it has put a big question mark over the software sector's potential. What needs to be seen is whether equity fund managers will reduce exposure to the stock while others continue to repose faith in India's most well known infotech company.
As for investors, the message is clear: diversification still holds the key.
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