What Infosys and Yes Bank Tell Us About Investing in a Scary but Exciting World

Jan 20, 2017

In this issue:
» Employment growth not in tandem with GDP growth
» Markets overcome Demonetisation blues?
» Round up on markets
» ...and more!
Bhavita Nagrani, Research analyst

Imagine you are the CEO of a bank. You are concerned about profits. Investors have high expectations and you are worried you may not meet them.

Competition is getting stronger. Loan growth is not as fast as it used to be. Keeping costs in check is proving to be difficult.

Then one day, your technology team comes to you with something new.

It is a revolutionary technology. It can cut loan processing costs by more than 70%. It can reduce loan processing time from four days to zero. It is completely secure. It can be scaled up easily and used in all types of transactions - loans, invoice discounting, remittances, bill payments, anything at all.

Best of all, it does not require a large team to operate.

Excited? I bet you would be.

Now what if I told you this is not my imagination working overtime?

This really happened.

The bank in question is Yes Bank and the technology in question is blockchain (more on this in the premium section below).

I don't know what happened to the employees whose jobs were affected, but it did get me thinking about the implications of this 'disruption'.

Are we ignoring the speed with which technologies like automation, artificial intelligence (AI), blockchain, big data analytics, machine learning, cloud computing, robotics, and the internet of things (IoT) are disrupting our economy? Our society? Our lives?

No one is sure about this. Even leaders of Microsoft and Google have said they don't know how this will play out.

Clearly, there is no agreement on this issue.

Rahul Shah explained why these technologies will be a force for good and why we should not be scared.

On the other hand, Ankit called it a crisis (though he does believe there is an opportunity in it that must not be missed).

While I broadly agree with both, I'm more pessimistic.

What is happening today is nothing like the last industrial revolution. When the car replaced the horse-drawn carriage, it was obvious that someone had to make the car. Not only did the car transform society; it created jobs for many members of society.

That is not the case today. Not only are these technologies eliminating jobs; new jobs are nowhere in sight.

Sure, the demand for some skills has gone up. However, do you see an entirely new industry (like car manufacturing) being created? I don't.

The reason?

These technologies are unlike anything we have seen in the past. This is why many people do not appreciate their astonishing power.

There is a common misconception that AI will free humans from mundane tasks. People will then be able to focus on more productive and creative activities.

There are at least three big problems with this narrative...

One, it assumes there are more productive activities that people will quickly switch to.

This is true only up to a point. A good example is Infosys. The company has been redeploying employees whose jobs have been automated by AI, into higher productivity jobs. But progress on this front has been slow thus far.

Also, what if the new high productivity jobs are not in the same industry as the jobs that were destroyed? How will people get the skills they need for the transition quickly enough?

Two, the time factor.

Even if everything works out great in the end, when will that 'end' come? Twenty years? Fifty years? Will an entire generation have to live out their lives with a poor standard of living so that the next generation can thrive? What if two generations have to suffer like this?

Finally, many believe that robots and AI can perform only 'left-brain' tasks - i.e. reasoning and analytics. Humans will dominate the creative 'right-brain' tasks.

But why should this be the case forever? What happens when a robot can compose better music than a human?

This is why it's important to stay on top of these changes. People, companies, and countries that don't will become obsolete. I have no doubt about it.

But I'm not a pessimist by nature. I'm a realist. The realist in me says that, while some will lose out, some will win big. For example, companies that embrace these technologies will create huge wealth for their shareholders.

Richa has already identified and recommended not one but two of them in Hidden Treasure.

One is a manufacturing firm that develops and uses their own robotics in-house to manufacture their products.

The other is an IT firm working with global software leaders at the cutting edge of the IoT and AI.

Both stocks are still trading below Richa's maximum buy price.

These are scary but exciting times. We can hope for the best. But should prepare for the worst.

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03:20 Chart of the Day

High economic growth is often associated with better employment opportunities. But the trend has been other way around over the years in India. As reported in today's Times of India, according to the study done by ASSOCHAM, the aggregate employment elasticity stood at about 0.04 during 2004-05 to 2009-10. Employment elasticity figure shows the percentage change in employment due to percentage change in output or GDP.

Employment Opportunities lags GDP growth

This clearly indicates growing disconnect between economic growth and jobs in India. Now this is despite, when India was witnessing high economic growth, the employment growth was much below the mark. For instance, during 2004-05 and 2009-10 India's GDP growth was 8.7% while employment growth was just 0.37%.India's labour force will expand by 160-170 million in 2020 This is certainly an alarming situation since in future, India's work force will surge. Reportedly, the labour force will expand by 160-170 m in 2020.

Policy makers look for 'new normal' in India's GDP growth rate with better job opportunities. But India's historical statistics do not offer much hope. Clearly, India needs to create sufficient jobs. With the fast rise in automation, can that happen?


Soon after the announcement of demonetisation, the Indian markets witnessed sharp plunge. The price to earnings multiple of Sensex touched lower levels at 20.1x on 24th November.

However as reported in today's Business Standard, the benchmark indices seem to have overcome the demonetisation blues.

The valuations have breached the levels where they had started. But what about the long term earnings trend for large cap companies? We are referring to businesses where earnings will revert to the mean after a long period of slowdown.

Rahul Shah stated in an edition of 5 Minute Wrap up.

  • If you've been value investing for some time, chances are reversion to the mean has been your best weapon and you didn't even know it. 'Reversion to the mean' has certainly helped us cut through a lot of noise and maintain perspective across a range of issues and 'crises'.

Tanushree Banerjee, editor of StockSelect, agrees. This is a metric that StockSelect team is really optimistic about in the long term. The team has already shortlisted stocks with an additional upside as the earnings revert to the mean.


In the meanwhile, after opening the day on a negative note, the Indian share markets have continued the trend and are trading below the dotted line. With the exception of stocks in the FMCG sector, all the sectoral indices are trading on a negative note with stocks in the metals sector and the PSU sector leading the losses. At the time of writing, the BSE Sensex is trading down by 210 points (down 0.8%) and the NSE Nifty is trading down by 62 points (down 0.7%). Meanwhile, the BSE Mid Cap index is trading down by 0.8% while the BSE Small Cap index is down by 0.5%.

04:50 Investing mantra

"Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere." - Warren Buffett

Please note there will be no issue of The 5 Minute WrapUp tomorrow, Jan 21, 2017.

Today's Premium Edition.

This Technology Can Make 'Digital India' the Shining Achievement of the Modi Government

How blockchain technology can revolutionise India's Financial sector.
Read On...Get Access

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1 Responses to "What Infosys and Yes Bank Tell Us About Investing in a Scary but Exciting World"


Jan 24, 2017

Humans are being substituted by various technologies. The motive is to enhance profits by lowering overhead expenses. The persons who have lost their earnings also cease to be customers for various merchandise. Wonder how will the profits be enhanced when the number of buyers are shrinking due to implementation of modern technology?
The earning employee is also a buyer. The growing volume of jobless people is also a major cause for dwindling buyers.

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