Infosys vs HDFC Bank: The 10 Year Bet? 

Who would you want to meet for lunch?

It would be Isaac Newton.

This conversation once took place between Warren Buffett and his protege Mohnish Pabrai.

In June 2007, Pabrai had made headlines by bidding with Guy Spier for a charity lunch with Buffett.

So, he wondered who would Buffett love to have lunch with. And Buffett's reply stumped him.

The desire to meet the 17^th century mathematician and physicist was not out of Buffett's greed for quantitative insights on stocks from the genius. Rather Buffett wondered how even someone like Newton could go wrong.

Brilliant scientists have been known to do foolish things. But Isaac Newton's financially disastrous moves during the South Sea Bubble of 1720 are a particularly remarkable blunder. Despite Newton's expertise in finance, groupthink led him to plunge into the South Sea Bubble and lose much of his fortune.

It seems Newton had invested early and liquidated his stake in the company early. But as the stock kept rising, Newton gave in to his greed and bought the stock again. Only to lose much of his fortune.

But the fact is that both the rise and the crash in the stock of South Sea were temporary. Data suggests that had Newton avoided selling or buying the stock for few more years, he would have bagged a decent profit.

Stock Prices of 17^th Century Bluechips in England

Now, why dwell on 300-year-old market crashes? Especially when we have sufficient cases of steep price correction in stocks close at hand?

Well, reason I referred to the South Sea bubble, Buffett's curiosity and Newton's folly is the repetitive nature of fear and greed cycles.

So, lets consider the recent market apathy towards Infosys.

Through 2022, most Indian tech companies began warning of slowing growth and loss of clients. But Infosys continued to impress analysts on earnings calls by talking up its revenue pipelines. To analysts' delight, the company kept raising its growth forecasts for the year.In January 2023, the company reported signing a US$ 3.3 bn contract value. So, it raised its full-year revenue growth guidance for the third time.

Naturally, the stock price kept soaring in anticipation of lofty near-term earnings growth.When the company prepared to disclose its full-year results in April, market expectations were high.

Unfortunately, the inevitable occurred.

Infosys failed to meet its own guidance, despite a reasonable earnings growth at 15.4% for the year. Analysts tracking quarterly numbers were disappointed. And the stock of Infosys was taken to the cleaners.

What the results did not say was that such earnings volatility has been a part of Infosys' track record for decades.

More importantly, the results do not reflect what the future holds for Infosys. Especially if the company succeeds with at least a few of its startup investments.

Did I say startup investments? Yes, you heard that right.

In 2015, when not many were aware of Open AI, Infosys was one of the first investors to invest in the company, along with the likes of Elon Musk, Amazon Web Services, and others. This came as a shock to many, as Indian IT companies are not known for investing in AI startups, especially the big ones.

However, when they do, they are bound to go big. For instance, while investing in OpenAI, the then Infosys chief Vishal Sikka had said that he was doing so because most of Infosys' work is "in building and maintaining software systems".

Sikka believed that AI would increasingly shape the construction and evolution of intelligent software systems, a phenomenon that we see happening now with the rise of coding assistants like Github Copilot and Amazon Code Whisperer.

As of now, Infosys has exited OpenAI. However, there are a couple of companies in Infosys' investment portfolio that can go as big as OpenAI did.

For instance, the name 'Infosys' is hard to imagine being associated with military; however, Infosys has invested in a drone solutions company, 'Ideaforge', which the Indian Armed forces have actively used for surveillance, crowd monitoring and rescue operations.

Currently, Ideaforge has a total of seven drones in operation. Two of them are used for mapping applications like land surveys, volumetric estimation and more, while four of them are used for security purposes like border security, anti-terror and crime control.

Ideaforge has itself applied for an IPO in February 2023...so more value unlocking is certainly on the cards for Infosys.

Thus, startup investments at Infosys may mature over several years...possibly even decades and in the meanwhile the upside from them may not filter into valuations. But it is important to keep a watch on them if the objective is to cash in on the tech bellwether's investments of surplus cash into new age tech majors in the making.

And the sharp correction in the PE multiples have been a great opportunity to accumulate the stock. But only if the investor has a long-term perspective.

Infosys' P/E versus Trailing 12-month EPS Over the Decade

Similar is the case with HDFC Bank.

After the merger with parent HDFC, HDFC Bank will become the largest private sector bank in the country with more than ₹20 lakh crore of assets. Of this, out of which ₹7 lakh crore will be the mortgage portfolio. HDFC was the largest issuer of debt in the local market in CY22, accounting for 7.7% of the issuances,

Lofty expectations about the merger with HDFC allowed the stock.... premium valuations for months.

Moreover, stiff competition with fintech peers has also got markets nervous about HDFC Bank's future.

What the bank's results do not tell you is how its consistency in keeping NPAs in check works wonders for the stock.

HDFC Bank has for dozens of quarters even when rest of its peers like ICICI Bank and Axis Bank were reeling under the burden of non-performing loans kept its quality of lending spotless. And that made a huge difference to the consistency of accretion to the bank's book value and valuations.

HDFC Bank's Price to Book versus Book Value Over the Decade

So, instead of going with near term trends and speculative bets on stocks like Infosys and HDFC Bank it is important to study their long term financials and valuations carefully. Especially if you are considering the stocks as your 10-year bets.

To delve deeper into the fundamentals of the 'best value stocks to have in your watchlist' the Equitymaster Screener can be a very useful tool.

By the way, if I were to hazard a guess on what Newton would tell Buffett at the lunch table, it would be this...

• It's not mathematical genius but disciplined buying and selling that works wonders.

Hope you like this video. Thanks for watching.