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Return of the blue chips - Views on News from Equitymaster
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  • Oct 13, 2001

    Return of the blue chips

    Monday blues, after U.S attacks over the weekend, were jettisoned as investors' bought into equity with corporate India's leading lights positively surprising the markets. Infy beat the street on second quarter earning estimates. Simultaneously, HLL declared plans of returning money to it's shareholders.

    Wary of every light in a tunnel being an oncoming train the events were a welcome opening for investor sentiment. That said, not many expected Infy's performance nor could they predict -- at least the timing -- HLL's capital restructuring programme. To that extent, it strengthens the belief in randomness of type of newsflow. Yes, with a slowdown in the economy and war close to home the chances of bad news is likely to overweigh that of good. One cannot say when those silver linings would flash. But one could bet who, more than others, is likely to be the silver lining.

    HLL and Infosys, one could hazard to say, are the best managed companies in the country. When the chips are down, all companies are likely to be adversely affected, which is the reason for more negative news flow. But, more often than not, it is the well managed companies that are likely to be less affected, increasing their chances of positively surprising. Even in prolonged periods of challenging business environment such companies adopt alternate strategies for rewarding shareholders; tender-offer buybacks, higher dividend, acquisitions etc. Therefore, looking dispassionately at investing, bet on probabilities.

    Infosys announced a top and bottomline YoY growth of 45.7% and 30.9% respectively for 2QFY02. The company not only is going to meet the guidance given at start of the year but is likely to beat it marginally. In April '01, while evaluating growth estimates, it seems, the management provided for some contingency factor. As providence or foresight -- depends on degree of fan following -- would have it, this contingency factor came into play in the very first year. Mr. Murthy is known to believe in under promise, over deliver. Guess, this time around he just managed.

    Infosys has grown from a Rs 38 m to a Rs 8,823 m company over the last decade. Employees have increased from less than 1,000 to more than 5,000 over the same period. Along the way, one can be sure, the company faced several growth pangs the complexities of which only increased. But then, that is why managements exist, to ensure smooth business operations. Based on the track record the company seems to have the neccessary systems to successfully overcome business challenges. Going forward, there is reason to believe, they would continue to do so more often than not.

    HLL, mid-week, announced plans of capital re-structuring and returning Rs 13.2 bn to it's shareholders over a period of three years. The company is expected to give -- issue date still foggy -- a bonus debenture of face value Rs 6 carrying interest rate of 9% p.a. to every shareholder. This will covert 60% of the company's reserves into debt leading to improved return on shareholders funds. At the same time, the funds are remaining on HLL's books for the next two years, which it can utilise in case an acquisition opportunity springs up. Having said that, the programme will dent bottomline growth due to interest payments. Over the past two years, HLL has faced challenges in achieving growth. Returning excess funds to shareholders helps in maintaining/improving investment ratios and enhancing shareholder wealth, which is then reflected on the stock price.

    The markets have rallied smartly over the past week. However, as we get deeper into the earning season the belief is that more companies than not are likely to disappoint. Therefore, an earnings driven rally seems unlikely. Further, although Afghan tensions have reduced, the possibility of escalation hangs in the air. The coming week is likely to be unexciting unless we have some more Infys' or Bin Laden decides to get back.



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