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21st January, 2004
23.00 IST (+05.30 GMT)

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India shining - The macro numbers and corporate results 
are finally singing in tune


Doubters of “India Shining” have been having a rough time these days, with the news about the economy getting better and better. The latest addition to the “feel good factor” comes from the November data for the Index of Industrial Production. 

The tepid growth in the IIP figures had been the favourite weapon of Doubting Thomases (or the Doubting Opposition) — the 5.3 per cent growth in October was widely flaunted as evidence of a gulf between the macro numbers and the hype and hoopla in the corporate world and the stock market. 

Well, the November numbers, with their 7.4 per cent growth in the general index and the 8.1 per cent rise in manufacturing, tell an altogether different story. 

What’s more, there wasn’t any base effect, and in fact the manufacturing index moved up pretty smartly from 189.3 in October to 194.2. 

On the other hand, the exceptionally low October figures may have been an aberration — recall that the IIP was up 7.1 per cent in September, while manufacturing was up 7.5 per cent. The point is that the manufacturing index has gone up by 6.8 per cent during April to November, and the trend is clearly getting higher. 

The 3.1 per cent average rise in electricity is certainly an anomaly, but perhaps the data doesn’t capture captive generation. An average manufacturing growth of 6.8 per cent was last breached in 1999-00, when it reached 7.1 per cent. It’s still a far cry from the double digit growth of the mid-nineties, but that’s because capital expenditure is yet to start. 

Pessimists might have a better time next month, because the manufacturing index went up from 179.6 in November 2002 to 195.4 in December 2002, and the jump in the index will have a depressing effect on the December 2003 figures. 

As for the GDP data, there should be no doubt at all that the growth rates for the next two quarters will be even higher than the 8.4 per cent notched up in the second quarter. That’s because, as a result of the drought in 2002, rates of growth had slowed down in almost all sectors. 

Here are a few examples: agricultural growth fell from -3.5 per cent in Q2, 2002 to -7.6 per cent in Q3; mining from 6 per cent to 3.8 per cent; construction from 8.6 per cent to 6.7 per cent; trade, hotels, transport etc from 8.1 per cent to 7.2 per cent and financial services from 7.0 to 6.3 per cent. 

So the Q3 figures will contain the effect not only of the good monsoons of 2003, but also the base effect of the slowing down in growth in Q3 2002. (GDP growth was 5.2 per cent in Q2, 2002, and a mere 2.3 per cent in Q3). 

With the elections likely to take place in April, the feel good factor will get another big boost from the Q3 GDP data, which will be out on March 31. 

Digital Global 

Digital GlobalSoft’s December quarter performance was much better compared with the previous two quarters - both revenues and earnings grew at a healthy 11 per cent sequentially. Earnings growth (before exceptionals and taxes) in the June and September quarters was at 3 per cent and -0.8 per cent, respectively. 

Revenue growth was once again driven by business coming from HP, which accounted for 74 per cent of incremental revenues. More than half of the additional business from HP came via the Digital Contact Centre (DCC) business, revenues of which jumped 40.25 per cent sequentially to Rs 22.3 crore. 

Since DCC’s work is primarily done offshore, the proportion of offshore work to total revenues jumped to 55 per cent last quarter, compared with 48 per cent in the previous quarter. 

Onsite work reduced 2.93 per cent sequentially and as a result travel and conveyance costs fell 200 basis points as a percentage of sales. 

This coupled with the higher proportion of offshore work led to a 90 basis points improvement in operating margin. Operating profit increased 15 per cent, and it was only because of lower other income that net profit growth was lower at 11.5 per cent. 

Based on stand-alone numbers, the Digital stock now trades at less than 19 times FY04 earnings, which is at a discount to peers. Moreover, the stock trades at a premium to the buyout price offered by HP. 

This is based on the belief that investors will ask for a hike in the buyout price through the reverse book-building process, and that HP is expected to grant that given its keenness to delist the shares. The strong December quarter results will only strengthen investors’ resolve to demand a higher buyout price. 

Emcee, with contributions from Mobis Philipose 

Source: Business Standard

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