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The rise and fall of tech funds

Aabhas Pandya

Year 2000 is ending on a jarring note for technology fund investors. With a slew of negative news for the sector in the last fortnight, technology funds hit a fresh low this week with Prudential ICICI Technology Fund and IL&FS eCOM Fund plunging by more than 50 per cent from their IPO price of Rs 10 earlier this year. The fall in technology counters has been so rapid that even a large cash position in most funds has failed to stem the slide in net asset values. The average cash holding was an uncharacteristically high 16 per cent on November 30 with some funds holding more than 20 per cent of their assets in money market instruments.

Take for instance, IL&FS eCOM Fund, which is down a whopping 70 per cent from its March-high of Rs 14.58. The fund had nearly 23 per cent of its assets in cash on November 30 but lost over 14 per cent for the one-month ended December 22, 2000. Despite holding nearly 31 per cent of its assets in money markets, Birla IT has plunged 14.7 per cent during the same period while the fund is off 69 per cent from its March high of Rs 40. Tata IT, with 25 per cent cash holding, is another prominent loser with its NAV falling by 16.9 per cent.

"With market leaders like Infosys taking the plunge this month, it is the only the cash component that is earning positive returns for the fund. In retrospect, it would have been much better had we maintained 100 per cent holding in money markets," quips a technology fund manager. An extreme statement indeed, but then, these are no ordinary times. "We went bargain-hunting only after the March-April fall in tech stocks but prices have only further dropped,'' adds the fund manager of another fund, launched earlier this year.

Apart from a sharp drop in Nasdaq and profit warnings from major US IT majors, funds have been hit by their concentrated investment in the market favourite Infosys. The stock touched a yearly low of Rs 5505 on December 27, down 30 per cent from its average price of Rs 7888 during 2000 and 57 per cent from its 52-week high of Rs 12,790 on March 7. Being the epitome of the Indian technology sector, Infosys has been hit by the recent downgrades of Indian IT services sector by brokerage powerhouses like Credit Suisse First Boston (CSFB), Merrill Lynch, Credit Lyonnais and Jardine Fleming.

"The Indian IT sector's ability to outperform is severely restricted due to the slowing US economy," CSFB has said in its report. The report points out that Indian IT companies would fall short of the market expectation of an average 70 per cent earnings growth in the current fiscal and beyond. "Going ahead, the pricing power of Indian IT services companies will drop and will be affected by a decline in the IT budgets for 2001 across all industries," adds the report.

There are currently two schools of thought on the impact of the US slowdown on Indian IT companies. Nearly 50 per cent to the Indian IT industry's turnover during the first half of the current fiscal had come from the US market. A section of the market believes that the slowdown will adversely impact the Indian IT sector while another segment opines that a cut in IT spending will benefit the Indian industry as US corporations seek to reduce costs by outsourcing more IT related activities. Currently though, it is the first line of thought that continues to dictate the market movement.

"Although Indian IT industry chiefs have averred that a slowdown in the US economy will be to India's advantage, this does not appear to be cutting much ice in the current environment,'' says S N Rajan at Kotak Mahindra AMC. CSFB also has a note of caution for those bullish on fresh outsourcing, given the cost competitiveness of Indian IT companies. "Offshore project execution requires different systems, leading to potential delays in shifting of work offshore, affecting near-term growth rates," says the brokerage firm.

The top rung technology companies may not earn revenues in excess of 70-80 per cent but they are sure to maintain growth at a healthy pace in future and outperform other sectors of the economy. The IT sector has so far broadly beaten the expectation of the market. It is time now for the markets to realign their expectations.

CASH FAILS TO RESCUE

Fund	Cash (%) on Nov 30	Infosys (%) on Nov 30	1-month loss (%) on Dec 22
Tata IT	24.43	10.28	-16.89
KP Infotech	23.21	19.56	-15.25
Birla IT	30.85	21.31	-14.69
IL&FS eCOM	22.73	—	-14.05
UTI Software	5.87	19.78	-12.82
Chola Freedom Technology	14.58	10.63	-12.59
Pru ICICI Technology	9.00	7.84	-12.55
K Tech	3.95	12.18	-12.51
DSPML Technology.com	12.75	8.62	-12.17
Alliance New Millennium	14.00	11.80	-12.07
Sun F&C Emerging Tech	10.06	10.15	-9.65
KP Internet Opportunities Fund	17.27	20.12	-8.77

Source: Value Research

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