In this edition, we talk about tech companies and how they are preparing for a slowdown. We also talk about the rupee’s continued weakness, the growth-inflation debate, and the dispute among the Kirloskar brothers.
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When the Covid-19 pandemic first began to spread worldwide two-and-a-half years ago, companies and businesses across sectors worldwide faced massive disruption. Well, not all sectors actually. One sector defied the trend.
No points for guessing the sector—technology. Demand for technology professionals touched the Cloud and tech earnings as well as stocks Zoomed (puns intended) as organizations both private and public required digital tools to stay functional. This, in turn, had several other effects. Attrition soared. Wages climbed. Tech startups raised billions of dollars from venture capital and private equity investors. And many of them floated IPOs as tech stocks soared.
The two-year euphoria has now ended. And how!
Sample this: Microsoft, the maker of Windows, is laying off 1,000 employees. Netflix, the savior of many a people locked up inside their homes during the pandemic, is letting go hundreds of employees. Snap, the parent of messaging app Snapchat, is firing 20% of its staff. Facebook parent Meta, Google parent Alphabet as well as chipmakers Intel, AMD and Nvidia are also either freezing hiring or cutting jobs.
Why are global tech companies tightening their belts? Well, they are just responding to an economic turmoil that is now playing out in much of the western world—high inflation, rising interest rates and an impending recession.
Their stocks reflect this fear. Google, Amazon and Microsoft have each lost almost a third of their value year to date. Netflix has dropped by more than half. Meta has slumped 60%. Snap is worth only a fourth of what it was at the start of 2022. For perspective, the S&P 500 has lost only about a fifth of its value in the same period.
So, now you know why that international mutual fund in your portfolio is down in the dumps.
India tech stack
Okay, got it. So, US tech companies have a lot on their plate. But Indian tech companies—and the Indian economy—are doing just fine, right? After all, the Sensex and Nifty are staying strong, no?
Yes, the two indices are flat year to date. But here’s how the tech pack has performed: Legacy IT services giants TCS, Infosys and HCL Tech have dropped around 20% each. Wipro and Tech Mahindra have slumped more than 40%. Paytm, Policybazaar and Nasdaq-listed Freshdesk are all down more than 60%.
It’s not just the stocks. IT companies are preparing for a recession in the US and Europe by controlling costs. Already, they are slowing hiring and moderating wage hikes as demand cools and attrition levels start to come down. Startup funding has fallen, too, and many of these ventures have deferred their planned IPOs.
And let’s not treat the Sensex as the barometer of the economy—a mistake that much of the press often makes.
How long will this uncertainty last? Well, it’s only just starting to get foggy—or smoggy if you live in Delhi-NCR—and it will take a while before the fog lifts.
Meanwhile, Infosys is now allowing employees to take up ‘gig’ jobs on the side. The rider is that such jobs should be taken up with prior consent of managers and shouldn’t cause a conflict of interest.
Is that another way of saying employees can augment their income by other means because salary hikes will be modest? Or is it just about accepting the reality of moonlighting? We’ll keep an ear on the raging debate!
Rupee-dollar
Talking about foggy outlook, the Indian rupee continues to weaken against the US dollar—it fell below 83 this week and is now projected to touch 85 in a few months. Oh sorry, the rupee isn’t really weakening. It’s the dollar that’s strengthening. Yes, that’s the argument Finance Minister Nirmala Sitharaman offered recently—to much ridicule.
To be fair, Sitharaman isn’t totally wrong. The dollar has strengthened against a whole basket of currencies, and not just against the rupee. But irrespective of the terminology we use, the fact is a weak rupee makes India’s imports costlier, feeds into inflation, jacks up the trade deficit, reduces forex reserves, leads to foreign capital outflows and weakens the economy. So, let’s not get confused and let’s get our house in order, please?
Growth-inflation
Meanwhile, a member of the Reserve Bank of India’s monetary policy committee has said the central bank should now hold interest rates to avoid stalling an economic recovery.
Wait, what? Hasn’t everyone been saying the RBI should increase rates to control inflation that has remained above its target for the past many months?
Indeed, that’s true. The RBI has lifted rates by 190 basis points since May. Add other liquidity tightening measures, and the overall impact would be around 250 basis points, according to MPC member Jayant Varma.
Varma was among the earliest to push for rate hikes. But at the MPC’s most recent meeting late last month he cautioned about weak growth. “It is dangerous to push the policy rate well above the neutral rate in an environment where the growth outlook is very fragile,” he said, according to the minutes of the meeting released late last week.
What explains this apparent about-turn? Well, you see, monetary policy transmission acts with a lag of a few quarters. So, the impact of the rate hikes will begin showing only by next year. Varma argues that if the RBI keeps increasing rates for too long, it will severely impact GDP growth.
For those unfamiliar or uninterested in how monetary policy works, think of it as drinking whiskey or vodka or whatever your poison is. You take one sip and feel nothing. So, you take another. And another. And another. Until you get a brain fog and wake up with a hangover!
The lettuce wins
If you think India’s situation is cloudy, just look at the UK for some comfort. Liz Truss resigned this week after just six weeks as British prime minister. Truss quit after the unplanned tax cuts she announced—and later retracted—dragged the pound lower, pushed borrowing costs higher, roiled financial markets, and drove investors away.
The chaos comes as the UK stares at recession and inflation stays at a 40-year high. Truss’ short tenure was so bad that the tabloid Daily Star had even started a live feed showing a lettuce next to her photo, asking readers: “Which wet lettuce will last longer?” Her resignation prompted the tabloid to declare victory.
Corporate conundrums
Back home, Indians are busy shopping for Diwali. And so were billionaires Gautam Adani and Mukesh Ambani. Adani bought aviation services firm Air Works for Rs 400 crore while Ambani purchased a Dubai villa for Rs 1,350 crore.
Meanwhile, the dispute among the Kirloskar brothers over a family settlement ignited this week. The dispute involves Sanjay Kirloskar, who controls Kirloskar Brothers Ltd (KBL), against his brothers Rahul and Atul, who run Kirloskar Ferrous Industries, Kirloskar Oil Engines and Kirloskar Pneumatic Co.
Rahul and Atul Kirloskar have accused KBL of misusing shareholder funds. KBL has dismissed the allegations. The brothers are also fighting a court battle. Sanjay accuses the other two of violating the family settlement and a non-compete clause. KBL had also accused Rahul and Atul of insider trading, but the Securities Appellate Tribunal has cleared those charges. The dispute, of course, is far from over, and we will watch it keenly.
Market watch
The stock markets shrugged off worries about inflation and growth to clock gains in the pre-Diwali week. The BSE Sensex rose about 2% this week while the NSE Nifty rose almost 2.4%, led by banking and FMCG stocks.
Axis Bank led the gains this week, rising 12%, followed by State Bank of India and Nestle. Other winners this were included SBI Life Insurance, Reliance Industries, ITC, ICICI Bank and Kotak Mahindra Bank.
JSW Steel, Asian Paints, IndusInd Bank and Hindalco were among the top losers.
Earnings Snapshot
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Nestle India July-September profit up 8.3%, net sales grow 18%
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ITC Q2 profit rises 20% to Rs 4,466 crore, tops market estimates
- UltraTech Q2 profit slips 42% to Rs 756 crore on higher energy costs
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Axis Bank Q2 net profit soars 70% to Rs 5,329 crore
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Bajaj Finance Q2 profit surges 88% to Rs 2,781 crore
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IndusInd Bank Q2 profit climbs 57% to 1,805 crore; net interest income up 18%
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PVR Q2 loss narrows to Rs 71.2 crore from Rs 153 crore a year ago, but bigger than forecasts
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Inox Leisure Q2 net loss narrows to Rs 40.37 crore from Rs 87.7 crore rupees a year earlier
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Asian Paints Q2 profit up 31% at Rs 783 crore, sales rise 18.8%
Other headlines:
- Tracxn Technologies gains over 16% on listing day
- CCI imposes Rs 1,338 crore penalty on Google for unfair trade practices
- V-Mart Retail acquires fashion commerce startup LimeRoad
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Auto-tech startup Droom drops IPO plan
The week ahead
- The markets will be closed on Monday and Wednesday next week, except for Muhurat trading on Diwali
- ICICI Bank, Kotak Mahindra Bank will release earnings over the weekend. Dabur, Dr Reddy’s, Maruti and Tata Power will report results next week.
Until next week, happy investing and a very happy Diwali!
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