There is a need to delink Nasdaq and Indian stocks

Nasdaq is driven by dotcom, technology, computer services and hardware companies. Indian IT industry, on the other hand, is mostly software service companies, which have different fundamentals. Our model is based on long-term contracts, continuous upgradation of technology, IT becoming more important. Dotcom is driven by the fundamentals of that business and whether IT can be a competitive advantage or not. Both are completely different models. Analysts do factor these fundamentals but the market — a sum of individual investors, FIs, FIIs — ultimately show a behaviour contrary to analysts’ rating. My appeal to market players is to de-link the two.

There have also been days when the Nasdaq went up but IT stocks here were hammered. Is it because the stocks were over-valued?
It is true, IT stocks have dropped more than the Nasdaq. Some people have been saying IT stocks were over-valued and that a correction was due. But if you look at FII investment, a good indicator of how stocks are doing, it is net positive. I have good reason to believe they are also buying IT stocks — there is no indication they are selling. The question is who is selling? That is not known.

One could argue that if the stocks settle at a lower level continuously now, then perhaps they were over-valued in the eyes of people. But I would not say they were over-valued then or under-valued now. Valuation is about two things: perception of what a buyer thinks the value is and what the real worth is. For example, the gold and silver content in an article doesn’t change but the price can go up or down depending on the demand-supply situation. Over-valuation or under-valuation today is also unfortunately decided by demand-supply which does not consider fundamentals. It is like the real estate scenario some time back. Prices went up in 1996. Some say housing is under-valued now, others say it was over-valued then. Who makes this judgment? It is made by various people based on their perception of how it is going to be valued one year from now, which again depends on the bullishness on the economy. Valuation is a perception of various people as to how much it (a stock) will go up 1-2 years from now. Ifthey think it won’t go up further, they call it over-valuation. The key word here is ‘think’. In reality, it could be higher or lower.

Many IT companies, with no established credentials, are entering the market. How will it impact investor sentiment and outlook on genuine IT companies?
If these companies don’t perform, the whole stock market will suffer. We should not be encouraging such companies which are changing their names. Taking the investor for granted is a serious matter. In the 90s, it happened with finance companies. If many promoters enter the field without understanding it, even good companies will be affected.

Analysts give a higher valuation to companies with a good management. Suppose both Mastek and XYZ Company show a Rs 20 crore profit, the valuation of Mastek will still be higher. To that extent there is already some discounting, but it is not enough. More correction and clarity is needed in the minds of investors and fund managers. We need to have a very fast system of legal recourse. Right now, it takes years before you get implicated. Many promoters have collected public money and just disappeared. Investment bankers should be more discerning about taking such companies public. If a well-known investment banker takes a company public, people believe them. Analysts also need to be ruthless. Advertising agencies, which promote them, should have certain norms. Finally, it is Buyers Beware. How many people read the risk factors? People will over-subscribe the issue even if the promoter was behind bars.

What should the investor look for in an IT company?
Management track record and reputation is even more important in IT companies because they are driven by intangibles. An incapable management with a first class manufacturing plant can still churn out good products. In a software company, if you do not have an excellent management, people will not work with you, they are not going to produce good software. And customer relationships, which are very important in this business, will not be long-lasting.

The investor needs to see how sustainable the model is: if 100 per cent of revenues come from one country or one customer, it is a very risky model. There should be market scalability, and the company should be able to scale its operations. You can’t run a software house without good systems and processes. Talk to the company’s customers and the people working for it. They will tell you all about the company.

Will the dream run of Indian companies on the Nasdaq and NYSE continue?
The US market is much less forgiving. There are companies that went really high and went down the tube as soon as they missed two quarters. It all depends on the track record which companies that go there create. That is the most important factor. The second thing is the success of the offshore software development model. If this advantage doesn’t continue, then fundamentals are going to get hurt. For the time being this is not an issue.

Will a dotcom crash on the Nasdaq affect Indian stocks?
Yes. A slump in any one sector will affect Indian companies. One of the reasons why the Nasdaq is going down is that there is perception that only a few dotcom companies will be in good shape three years from now.

India’s share in the global software market is very small. Is there any possibility of a significant increase in the near future?
The share of India’s software exports is growing every year. We have been growing four times faster than the global software industry. The global software industry is growing at 12-15 per cent and the Indian industry is growing at 50 per cent. We are continuously gaining market share but it is still small. Because it is small, it is an opportunity: growing from 70 to 75 per cent is difficult but from 1 to 6 per cent is not difficult. I don’t see any sudden increase in market share, like doubling.