Why I am bearish on Infosys (@ Rs 1585 , as on 13 Jan 2008) ...
Infy has posted yet another quarter numbers.One could not but observe that the media is less and less interested in Infy results as it was in past. Come on, this is not 2000 or 2003, this is 2008 and India is not just about Software Programmers and Computer Geeks (like me.. LOL), India is also about making world's cheapest Car (thank you Tatas).
This is my Take on Infosys (the scrip) at these valuations :
The Big picture -the US Slowdown/recession which is no longer a distant threat but a real possibility. What follows it is a near certain rate cut and resulting drop in US Dollar. Add to it the heavy BFSI exposure, the very sector hit by sub prime problems. Now with rising asset inflation, US financial biggies are likely to be out of favour with market (even with great rate cut). All in all the scenario is going to be hurtful for all Tech outsources from India. The argument that Tech outsourcing will only increase with US slowdown worked well in 2001-02 when US Dollar was rising against rupee and Indian wages were low. Today, it is exact reverse- US Dollar is falling and Indian Techies are demanding more wages. And add to it 2009 when taxation rates may start going up (like ESOPs, Chidu may take a harsh stance on Tech cos and make them pay higher taxes now).
The Infy Picture - Given this big picture, every tech outsourcer that has over 60% US exposure and heavy BFSI exposure should get hit - not in terms of existing revenues and profits, but in terms of new revenues/growth. Infy qualifies, so do many tech companies. But the problem unique to Infy is that Infy is enjoying highest profit margins compared to its pees, pointing to the fact that they will face greatest pressures when they expand in lower margin markets. This is why Infy is most likely to geet hurt more than say a TCS . TCS has quite some non US low margin market business, and Wipro has a low margin Non Tech business. Wipro has a greater Telecom exposure. TCS does business in low margin Domestic IT sector. Infy does not do much of such things (relatively) , because they are lower ROCE businesses. Till now. When the recession begins and US goes slowdown mode, where will Infy pick new markets? Only from low margin /low ROCE markets. Infy is not having both, so it boils to how come Infy enjoy further growth with same high profit margins. Infy will grow, but the growth will be at much lesser profitability. The current valuation of Infy does not factor it IMHO.
Must also add this - Among the big three (TCS, Infy and Wipro), Infy is unique in having high float - so any big ticket acquisition would happen slower in Infy (because of equity dilution hesitancy that exists with all institutionally owned companies) . Whereas a TCS with support from Tata & Sons may do more daring acquisions and a Wipro with non Tech business could expand to other sectors (like say FMCG).And any bear market will hurt Infy more since the buyback support that exists in Wipro and TCS doesnt exist in Infy.
So, I think infy should fall another 15-25% to reflect this reality. But will it happen? Infy has fallen so much since Feb 2007 . Did any expert stand out on Feb 15 2007 and say that Infy has a big downside from that day?
This is my Take on Infosys (the scrip) at these valuations :
The Big picture -the US Slowdown/recession which is no longer a distant threat but a real possibility. What follows it is a near certain rate cut and resulting drop in US Dollar. Add to it the heavy BFSI exposure, the very sector hit by sub prime problems. Now with rising asset inflation, US financial biggies are likely to be out of favour with market (even with great rate cut). All in all the scenario is going to be hurtful for all Tech outsources from India. The argument that Tech outsourcing will only increase with US slowdown worked well in 2001-02 when US Dollar was rising against rupee and Indian wages were low. Today, it is exact reverse- US Dollar is falling and Indian Techies are demanding more wages. And add to it 2009 when taxation rates may start going up (like ESOPs, Chidu may take a harsh stance on Tech cos and make them pay higher taxes now).
The Infy Picture - Given this big picture, every tech outsourcer that has over 60% US exposure and heavy BFSI exposure should get hit - not in terms of existing revenues and profits, but in terms of new revenues/growth. Infy qualifies, so do many tech companies. But the problem unique to Infy is that Infy is enjoying highest profit margins compared to its pees, pointing to the fact that they will face greatest pressures when they expand in lower margin markets. This is why Infy is most likely to geet hurt more than say a TCS . TCS has quite some non US low margin market business, and Wipro has a low margin Non Tech business. Wipro has a greater Telecom exposure. TCS does business in low margin Domestic IT sector. Infy does not do much of such things (relatively) , because they are lower ROCE businesses. Till now. When the recession begins and US goes slowdown mode, where will Infy pick new markets? Only from low margin /low ROCE markets. Infy is not having both, so it boils to how come Infy enjoy further growth with same high profit margins. Infy will grow, but the growth will be at much lesser profitability. The current valuation of Infy does not factor it IMHO.
Must also add this - Among the big three (TCS, Infy and Wipro), Infy is unique in having high float - so any big ticket acquisition would happen slower in Infy (because of equity dilution hesitancy that exists with all institutionally owned companies) . Whereas a TCS with support from Tata & Sons may do more daring acquisions and a Wipro with non Tech business could expand to other sectors (like say FMCG).And any bear market will hurt Infy more since the buyback support that exists in Wipro and TCS doesnt exist in Infy.
So, I think infy should fall another 15-25% to reflect this reality. But will it happen? Infy has fallen so much since Feb 2007 . Did any expert stand out on Feb 15 2007 and say that Infy has a big downside from that day?
posted by ramki830 at 8:00 AM
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