Moneycontrol Pro Panorama | Shareholders in the driver’s seat

Just as IT companies return capital to shareholders, will other companies follow suit?

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

If you can invest in GOI 10-year bonds and lock into yields of 7.3 percent or get a percentage point more for triple-A rated corporate fixed deposits, what’s the expected return that makes the risk of investing in equities worth it? While there are formulas that do this, what would you be all right with? Does 15 percent sound good, or a bit less or a bit more? As corporate earnings start flowing in, these are questions some investors are likely to ponder over, as they evaluate the future.

That may, in turn, put pressure on companies to do more to justify their valuations or suffer at the hands of investors. Do read today’s FT selection (free for Moneycontrol Pro subscribers) on how tight monetary policy may be influencing the fate of ‘safe stocks’. But, back to India, consider what the IT sector is faced with, as companies disappointed investors with their weak revenue guidance. The companies are cutting back on headcount to lower costs with the fresher intake likely to suffer, with some such as Infosys planning to skip going to engineering campuses for recruitment altogether.

While this is not equivalence, to the lay person it may seem jarring that companies have money enough to announce massive buybacks, but are scrimping on hiring. TCS has announced a buyback worth Rs 17,000 crore at a premium of 15 percent to the then prevailing market price. And, the thing is that it’s not all bleak days for the leading IT companies as their order books are swelling up even now, as this analysis in today’s edition points out, although there are differences in metrics such as cash management. But that’s the thing, the IT index is down 2 percent since results began to flow in as investors repriced stocks in line with changed expectations.

While company managements sit in air-conditioned rooms with spreadsheets and back-calculate what they need to do to give earnings the maximum push, the 2024 batch of students will be sweating it out at these headlines. They have invested four years of time, energy and money in these courses, in the hope of building a career in the software industry.

As Subir Roy points out, the IT sector has been one of the main paths for India’s middle class to a better life. Get hired from campus, put in the initial years in India, and then go abroad to the US or Europe on assignment. Life’s sorted then. While it’s not as if companies won’t hire at all but a dip in numbers means fewer vacancies, more competition and the distressing possibility of having to settle for something less than you hoped for when you bagged that seat four years ago. Thankfully, though, the growth of global capability centres and positive hiring trends in other sectors such as BFSI should provide alternative options.

It is a feature of capitalism that shareholders get importance over others, although in India promoters are more equal than other shareholders. Just as IT companies return capital to shareholders, will other companies follow suit? Or will they invest behind growth and contribute to the animal spirit-lifting private sector capex that everyone keeps talking about? High interest rates also mean that returns on projects should be high enough to justify the investments.

Today’s chart of the day uses Crisil’s sectoral estimates in Q2 earnings to show that profitability is healthy, but sequential trends point to a slowing down. A trend of sales growth trending to normal growth levels and EBITDA margins tapering could see companies turn cautious. Pay close attention to management commentary on how they view the business scenario.

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Ravi AnanthanarayananMoneycontrol Pro