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Nasdaq Tremors Rock Dalal Street

Profit-warning from Nortel, one of the main clients for Infosys and Wipro, pushes the Sensex below 3400

With the markets already reeling under the shadow of rolling settlement, the spate of profit warning from the Nasdaq only added fuel to fire. With FIIs joining the sellers later in the week, the Sensex dipped by 123 points to close below the psychological barrier of 3400 points. On a year to date basis, the Sensex has lost 15%, shedding 582 points in the process.

The profit warning from two-technology bellwethers on Nasdaq, Nortel Networks and JDS Uniphase, pushed the precariously poised Sensex in the bear grip. Nortel is one of the top clients for Infosys and Wipro and hence, the earnings guidance rang warning signals back home. Even as both the companies have diversified their client base and could be less prone to warning, the sentiment was nonetheless dampened. While profit warning from clients may queer the pitch in the short-term, addition of large number of new clients in the current calendar is expected to start paying dividends later in the year.

However, the NASSCOM's downward revision in growth rates for the Indian software sector added to the gloom. The representative body has brought down the expected growth rates from 40-45% to 36%. If the spate of profit warnings continues in the reporting season, the outlook is anything but positive for the sector.

Nortel Networks has forecast a massive loss of 48 cents per share for the second quarter, far in excess of the expected six-cent, blaming a severe downturn in demand. It plans to slash another 10,000 jobs, in addition to the 20,000 it announced in April. With McDonalds joining technology heavyweights with earnings warning, US markets ended the week deep in the red. The NASDAQ, at 2044, lost 8.4 % (down 17.8% for the year) after going below 2000 points on Friday.

Even as technology stocks continue to languish, buying could emerge in pharma and FMCG stocks. The markets are eagerly awaiting the official announcement on dilution of Drug Price Control Order (DPCO). This is likely to buoy stocks of companies like Glaxo and Hoechst Marion as most of their products fall under price-control. On the other hand, a good monsoon is expected to revive the fortunes of FMCG companies, with a pickup in rural spending. Interest also seems to be picking up in B group stocks, media stocks in particular, which will not move to compulsory rolling settlement this July.

Outlook
The impending rolling settlement and uncertainty over Q1 results does not augur well for the markets in the short-run. If the spate of profit warnings from the NASDAQ continues, it is likely to pull down Indian markets to fresh lows. Already, the NASDAQ is trading close to the psychological level of 2000. Even if the Federal Reserve goes ahead with a higher than expected rate cut, turnaround, if any, is expected only towards the end of the current calendar.