Bright future for infotech stocks
Deepak Sahijwala & Sanjay R Bhatia

From astounding highs to disappointing lows, from speculator ‘darlings’ to street pariahs, from market leaders to market laggards, IT stocks have seen it all, through the last twenty turbulent months. And just when almost everyone was writing off the future of IT stocks, a reversal is silently unfolding—and once again IT stock prices and trade volumes have begun rising, albeit without the explosive dramatics of the past.

The question on everyone’s mind now is: What does the future hold for the Indian IT sector and what trends will IT stocks chalk out? Will the recent rise in prices be sustainable or will it have to be written off as a corrective rally in a bearish market?
Hearteningly, the answer from a purely analytical perception—both technically and fundamentally is that the future looks good...very good!.

Although various factors continue to influence the Indian IT sector’s performance, including the economic indigestion and uncertainties plaguing the US, the strongly rooted abilities and resilient backbone of the Indian players will see them emerge through, more so as newer and bigger markets are discovered and tapped. Perhaps, the recovery of the US economy could bring back the lost sheen and glory to the sector stocks, but with or without that, the sector leaders will continue to register growth rates in the range of 20-30 percent per annum—and that should be considered good and healthy. On the domestic front, the soon to be announced budget will certainly influence sentiment, if not the trend per se. It is important that the Finance Minister realises this and includes it in his basket some much-needed reforms and tax breaks, and a further fillip to a sector in which India’s leadership in the world arena remains unmatched.

Technically, the view is clear. IT stocks are headed upward albeit with occasional corrective declines, and from a long-term investment view, continue to hold the greatest promise.

This column analyses the individual trends of the market index as also sector favourites and forecasts what 2002 holds for them.

BSE Sensex
The market continues to face resistance at the 3448 level and it is essential that this level be crossed for the markets to resume the bull rally once again. It is also imperative that the market stays above this resistance level of 3448 for at least four trading days initially and later for twelve trading days, for this resistance level to become a strong support level. Till this level is crossed the markets will continue to behave in a range-bound—and occasionally in a lacklustre—manner. As the Budget draws closer, volatility is expected to increase.

Presently, the index has closed at 3373 level and once it rises above the 3448 level it should rally to the 3607 level which is the next resistance (which should not be difficult to cross) and then to the 3737 level. If this resistance level is crossed, the markets will rally to the 5000 level, probably by December 2002.

CMC
The erstwhile government undertaking, recently taken over by the Tata Group, reflected a negative divergence for the period between March 5, 1999 and January 28, 2000 at Rs 642 and Rs 873.35 levels respectively. Thereafter, the stock has started to decline and fell to a low of Rs 158.40 on October 31, 2000. It reflected a positive divergence on the weekly charts during the period August 14, 2000 to October 17, 2000 at Rs 180.20 level.

The stock rose to a level of Rs 405 from the low of Rs 180.20 and the rally ended at this level and the stock again began its downward trend to fall to a level of Rs 204. The stock again gave a positive divergence during the period March 22, 2001 to September 17, 2001 at the Rs 198.80 level to again rise to the present level of Rs 412.55 on January 7, 2002.
Technically, the stock presently in a bull run needs to consolidate at present levels and we could see a consolidation pattern unfolding. Crossing above the Rs 417 level could see a resumption of the bull rally and the stock could rise to touch the Rs 750-Rs 760 levels.

Digital Globalsoft
The trend of the stock has been bullish since it crossed the level of Rs 266.25 on October 11, 2001 and has outperformed the market since then. The weakness in the market post 9/11, particularly in the infotech stocks, did not affect this stock greatly and it continued to move upwards amidst intermediate corrections. The impending outcome of Compaq and HP merger could impact the future movement of the scrip.

Technically, although the stock is above its 200-day moving average at Rs 561, it would be difficult for the stock to continue its upward movement and outperform the market in the short-term. The stock currently needs to consolidate at present levels. It faces resistance at Rs 728 and Rs 752 and if it is able to move above this level and then consolidate above it, a sharp rally and the probability of crossing its all-time high of Rs 1,574 cannot be ruled out.

Infosys Technologies
The bellwether stock of the Indian IT sector has displayed signs of bullishness ever since the stock gave a positive divergence on the Daily charts during the period April 11, 2001 to September 20, 2001 and on Weekly charts during the period April 17, 2001 to October 1, 2001. The stock has risen from a closing low of Rs 2,187.35 to the present levels at Rs 3,881. The stock reflected a negative divergence on January 8, 2002 and has fallen below its previous intermediate low of Rs 3,906.50 to touch a new intermediate low of Rs 3,866.35 on January 15, 2002, but the stock has been able to rise above both this levels, displaying a bullish undertone.

Technically, the stock is above its 200-day moving average and is moving in a sideways manner after declaration of its the Q3 results, which did not hold any surprises for the street. It is essential that the bellwether stock moves above the Rs 4,232 level to resume its upward journey. And this could lead a rally in the infotech sector. An appreciation of 50 percent should be seen if this level is crossed.

Satyam Computers
The Satyam stock has shown sign of bullishness ever since the stock gave a Buy Divergence on the Daily charts during the period March 8, 2001 to June 22, 2001 and on the Weekly charts during the period March 13, 2001 to October 9, 2001 and has risen to a high of Rs 332 on January 8, 2002 from a low of Rs 118.95 before settling at the current levels of Rs 274.35 on January 18, 2002. Even though the stock was able to outperform the street’s expectations for its Q3 numbers, in the long-term it is essential that Satyam sells off its investments in Sify and concentrates only on its core infotech business. This decision of selling Sify or retaining it will have a long-term impact on the price of the Satyam stock.

The stock is currently trading at Rs 268.45 on January 23, 2002 and is presently in a consolidation phase above its 200-day moving average and should resume its uptrend once this phase is over. The stock faces resistance at the Rs 448 level and if it is successfully crossed, the Rs 700 level should not be difficult to be achieved.

Wipro
The floating stock of this scrip is very low and it has never been fancied by the FIIs, who have always preferred Wipro’s counterparts such as Infosys and Satyam. Therefore it is important that fundamentally the stock outperforms the street expectations whenever it declares its results, so that it could catch the attention of the fund managers.

The stock presently trading at Rs 1,574 levels, is above its 200-day moving average and has moved up since it was able to break out from a symmetrical triangle on November 14, 2001 at the level of Rs 1,112.40. The Q3 results declared were below market expectations and the stock has not been able to move above its intermediate high of Rs 1830.25 touched on January 8, 2002. It is important that the stock initially rises above this level to make any kind of upward progress. Once this level is crossed the stock should see a momentum in the rally and it could appreciate by around 40-45 percent.

HCL Technologies
The present price of the stock is Rs 251.70 on January 23, 2002 and it faces major resistance at Rs 292 levels on the Weekly charts and Rs 333 level on the Daily charts. If these levels are successfully crossed by the stock it could touch a new 52-week high. If the stock moves above the resistance level then an upward rally should take the stock to a level between Rs.700-Rs.750.

NIIT
The biggest casualty of the dot com bust, the slowdown in the US economy and the 9/11 incident, has been NIIT. The stock has tumbled from its all time high of Rs 3,657.75 touched on January 3, 2000 to an all-time closing low of Rs 87.60 (intra-day low of Rs 86) on September 21, 2001, and reflected a positive divergence between the period July 31, 2001 (closing price Rs 167) to September 21, 2001 (closing price Rs 87.60), to soon bottom out and bounce back to present levels of Rs 264 (closing on January 21, 2002).

The stock is currently trading at Rs 249.75 and is displaying signs of bullishness and is closer to crossing its 200-day moving average. Once the 200-day moving average is crossed the stock should witness a sharp rally and should then consolidate its gains. The stocks face resistance at Rs 831 on the weekly charts and Rs 928 on the daily charts.

NASDAQ in consolidation phase
For IT stocks, the worldwide benchmark index is most certainly the NASDAQ. And such is its following as also influence, that at times Indian infotech stocks literally seem to mirror its behaviour, their inherent trends notwithstanding. Naturally therefore, it is keenly monitored and any analysis or forecast without it being focused upon would be incomplete. So what does the NASDAQ forecast?

Technically, after a sustained rally through 1999 the NASDAQ peaked on March 10, 2000 closing at 5048 points (intra-day high 5132). Since then, after the dot com bust, it has seen a sharp decline to touch an intra-day low of 1387.05 on September 21, 2001 before closing at 1423.19. Thereafter, it reflected a positive divergence during the period April 6, 2001 to September 21, 2001 at the 1423.19 levels on the weekly charts, indicating clear-cut bottom formation and has seen a sharp rally since rising to a level of 2044.27 on January 3, 2002.

Presently, the NASDAQ has closed at 1922.38 and is trading below its 200-day moving average. The index is presently in consolidation phase. The major resistance level for the NASDAQ on the daily charts is 2547.53 and 2568.87 on the weekly charts. If the NASDAQ is able to cross successfully above both these levels, than, we will see a strong bull rally which should take the NASDAQ above its all-time high of 5048.