The game called 'Infosys' - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The game called 'Infosys' 

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In this issue:
» Brighter side of financial crisis
» What if Infosys misses its guidance this year?
» Stocks rise as central banks enter salvage mode
» Value lies in the eyes of shareholder
» ...and more!

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00:00 Opportunity amidst adversity
Is running a Lehman Brothers like operations a zero sum game? Try asking that to corporations who are looking for cheap office space in Manhattan, where the troubled bank had its headquarters and you are most likely to see a big nod of approval.

With most of Wall Street mired in steep losses, it is unlikely that it will rent out extra office space over the next few years. In fact, even the current office space might be in grave danger of being massively scaled down. This is proving like a godsend for other non-financial entities that often got nudged out by the deep pockets of Wall Street firms in their halcyon days. What is more, there are quite a few other instances of the recent credit crisis throwing up opportunities for other firms and people alike to snatch the limelight away from their previously high profile but recently tainted brethren.

Indeed, with reams and reams of paper being spent on writing obituaries of companies engulfed in the recent crisis, one should also try and look at the brighter side of things. And the freeing up of office space is one such positive that has come out of the crisis. Deliberate or not, the new owners of this office space would learn a huge lesson in how one should not get carried away by the herd mentality and instead wait for the right opportunity to strike. A gentleman who answers to the name of Warren Buffett has done exactly that most of his life and he hasn't done badly for himself.

00.47 What if Infosys misses its guidance this year?
What if a company that has been a case study of under-promising and over-delivering for so many years goes down on its promise this year? Well, as reported in a leading business daily, the management of India's second largest software services exporter Infosys has indicated that slowdown in the US can severely impact the company's performance during the current quarter (ending September 30th 2008) and fiscal. However, it has remained silent on any under-performance on what it has guided for the quarter and the full year. As a matter of fact, Infosys had guided for a topline and bottomline growth of 28% YoY and 22% YoY respectively for the current fiscal when it reported its last quarterly results (July 2008).

In a recent interview with the same business daily, the company's CEO had said that there was still a lot of uncertainty left in the US on the back of turmoil in the financial and credit markets. Technology research firm Forrester has recently reported that around 40% of large businesses across sectors have cut their IT budgets this year, including almost half of financial services companies, which are typically the biggest spenders on technology.

Infosys' has always been an 'expectations' game. As the company nears a result announcement period, newspaper and television channels pump up reports after reports as to what can be expected of the company and what kind of 'guidance' will the management provide for the next quarter or the next year. The stock is punished even if the company performs well but not 'as per expectations'.

Well, the management team at Infosys, while wondering how to stop the departure of quality people from its aisles into that of competitors and at the same time continue to meet clients expectations, has not given into wondering about whether it will be able to meet the 'street's' expectation or not! We do not expect it to do it this time as well.

In the meanwhile, the (expectation) game continues...

  • Also read - Indian IT's 1QFY09 review

    01.42 Colour of money...

    ...changes the way you handle it. Be rash with money, and it vaporises. Be smart, and you are recognised and respected. As reported by Forbes, which compiles the list of the world's richest, while volatile financial markets have bruised several fortunes of the Forbes 400, swelling oil and contemporary art prices have provided an unexpected hedge to a few others.

    Microsoft's co-founder Bill Gates (who now devotes his time and riches to philanthropy) maintains his tag of the world's richest man with a net worth of US$ 60 bn. Warren Buffett holds fort as the runner up after having won the crown from Gates for a few months at the start of this year.

    2:01 Deep value what?
    A strategy report on Lehman Brothers' website (which still exists!) talks about the benefits of investing in value stocks as opposed to growth stocks that were no longer cheap at the time of release of this report (April 2008). Interestingly, the report lays specific emphasis on investment in stocks of financial companies.

    The writer of the report then thought that stocks of financial companies comprised around 80% of deep value stocks available in the US markets. Simply put, 'deep value' stocks are those that are attractively priced in relation to expected future earnings growth.

    Look what has happened to these stocks thereafter (including the ensuing performance of Lehman's stock)!

    Fall of the mightiest!
    Stock price (US$) 52-wk high CMP Decline from top
    AIG 70 2 -97%
    Washington Mutual 39 2 -95%
    Merrill Lynch 79 19 -75%
    Citigroup 49 14 -71%
    Morgan Stanley 70 22 -69%
    Goldman Sachs 251 115 -54%
    Lehman Bros. Ticker no longer available!!
    Bear Stearns Ticker no longer available!!
    Source: Yahoo Finance

    The report states - "Value has become synonymous with financials, which we think are set to outperform. We think that the sector will rally from here, that it offers extreme value compared with its history."

    Well, history has been made. Lehman is almost extinct now on an independent basis and so is the case with so many financial companies in the US. There are some that have been saved by the Federal Reserve by granting a bailout.

  • Also read - Simple survival lessons

    As Fortune recently reported - "The demise of old Wall Street isn't just about bad bets on mortgages or the hubris of its creators. It's the failure of an antiquated, risky strategy. The model had an obvious and fatal flaw. Earnings on Wall Street no longer came chiefly from recurring businesses but rather from a combination of huge leverage and huge risk."

    And now when the good luck has turned, the shareholder wealth supporting all that leverage is being wiped out.

    Ultimately, 'value' lies in the eyes of the shareholder. Whoever thought that bad businesses (as in the Wall Street types) had tremendous value due to their lower valuations is paying the price of short-sightedness.

    03:07 In the meanwhile...
    Led by US Fed's and other central bankers' financial rescue plan to ease global liquidity, Indian and other Asian stock markets closed strongly in the positive today. In India, the benchmark BSE-30 index rocketed by more than 700 points (up more than 5% over yesterday's levels). Banking, software and oil & gas stocks led the gainers' list. In the rest of Asia, benchmark indices in China, Hong Kong and Taiwan posted the biggest gains - around 9%, 8% and 6% respectively. European markets have opened strongly today, with UK's FTSE index trading almost 7% up currently.

    China's gains were also on account of changes in stockmarket regulations, after the government scrapped the tax on equity purchases to halt a slide that has erased US$ 2.6 trillion of market value over the past few months. The government is also said to be buying shares in three of the largest state-owned banks - Industrial & Commercial Bank of China, Bank of China and China Construction Bank.

    Governments' support to financial companies to prevent the global financial crisis from spreading has however proved to be the undoing of gold's run-up of the past few days. The yellow metal declined today on speculation that its rally this week had been excessive. Gold has however already rallied more than 10% this week, the most since October 1999.

    03:38 Are Indian banks safe?
    The Indian economy could see a tightening in credit supply due to the ongoing squeeze in the US financial markets. However the RBI is ready to infuse adequate liquidity in the system to tackle the problem. This was indicated yesterday by finance minister P. Chidambaram. However ironically, while the FM pointed out that India's public sector banks have virtually no exposure to the debt of Lehman Brothers and are properly insulated, SBI (the country's largest bank) has indicated that it holds some of the distressed investment bank's bonds.

    While the Indian banking behemoth has already provided around Rs 200 m towards this exposure to Lehman Brothers, it must be noted that this is in clear dissonance with the bank's chairman's recent remarks that SBI did not have any significant exposure to Lehman and was completely insulated from any negative impact on its earnings. This development not only casts doubts on the credence of the statement but also opens up the possibility of Indian banks being affected at least to some extent by the global credit crisis.

  • Also read - Lies, damned lies & statistics

    04:03 Ranbaxy appoints US mayor as its trouble-shooter
    The biggest drug maker in India is in the news again. Ranbaxy, whose troubles with the US FDA just seem to take on a new twist every time has now appointed the former New York City mayor Rudolph Giuliani to help respond to a US order blocking import of more than 30 of the company's generic medicines. And since it is an US regulatory authority that is giving headaches to the company, it probably explains why Ranbaxy has turned to an American to advice it on how to quickly resolve the issue.

    Two of Ranbaxy's manufacturing plants came under the FDA scanner when they were found to be non-compliant with the quality standards enumerated by the US agency. Ranbaxy's subsequent responses to the FDA's allegations have failed to yield any positive results for the company.

    Unless and until Ranbaxy takes fast steps to adhere to the quality standards of the FDA, its credibility stands at stake. Interestingly, the promoters of the company have exited the company at a 'convenient' time to pocket a cool premium for their shares, while the minority shareholders are left to grapple with the wrongdoings of the company.

  • Also read - Ranbaxy's perverse engineering

    As Mr. Ajit Dayal, the co-founder of Equitymaster, recently exclaimed - "Ranbaxy has reminded us that, for all the exciting investment opportunities that exist in India, we swim naked much of the time. And, for all our speeches and TV talk of how modern our business operations are, a founder shareholder will always know a lot more than a 'minority'."

    04:42 Today's investing mantra
    "People always want a formula - but it doesn't work that way - you have to estimate total cash generated from now to eternity, and discount it back to today. Yardsticks such as P/Es are not enough by themselves." - Warren Buffett
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