Tuesday, February 24, 2009

INFOSYS STOCK ANALYSIS: COFFEE SHOP COMEDY

We all know Allen Stanford has been investigated for fraudulent activities. But poor West Indian cricketers, Chanderpaul and Sarwan did not have any idea about this man and reinvested the entire 1 million dollars they received as prize money for the Stanford 20/20. Now their return on investment is as high as minus 1 million dollars. Against this backdrop, our own Sachin and Sehwag went to a coffee shop before leaving to New Zealand and both were discussing about investments. Let’s see what they were talking about.


Sehwag: Bhaiya, it’s great that you have come at the right time. I was discussing about investing the money we earn, sometime back with my agent and he was not that knowledgeable.

Sachin: You should consult me. Let me first order coffee for us.

Sehwag: OK. Tell me…Where do you invest?

Sachin: Mmmm…..I in fact invest in windmill projects particularly in Rajasthan and I get significant Tax Savings.

Sehwag: Gash…You don’t leave out any avenue of earning.

Sachin:
Who will? But now I am thinking to buy INFOSYS.

Sehwag: Bhaiya, Have you already earned that much to buy INFOSYS?

Sachin: Bhuddhu, I am not buying the entire company but INFOSYS Shares.

Sehwag: If that’s the case why don’t you buy SATYAM which is available for paltry price and you can earn lot of money when everything gets settled.

Sachin: Ha Ha…..Now I know why you play the way you do. No speculation my boy. I am an investor not a speculator.

Sehwag: OK. What did you find special in INFOSYS when there are many good companies.

Sachin: It’s a well respected company and best among the software companies. But I have asked one of my friends who is writing a stock market blog (he he) to come up with an analysis of INFOSYS and he just sent an email with all the details. What you see here is the peer level analysis table which he sent. It contains balance sheet details and ratios. This table is based on 2008 Third quarter data.

(Please Visit the Following Link to access the table)

http://docs.google.com/Doc?id=dhz5xq7_6fn95wbc2

Sehwag: I have no idea about all these. Explain me.

Sachin: I don’t need to explain anything here. It’s very clear from the table that other companies pale in comparison with INFOSYS. It has higher reserves, higher bank balance, higher gross block and higher net block.

Sehwag: Wait wait wait….What is gross block and Net block?

Sachin: Gross Block is the cost of fixed assets and Net Block is cost of fixed assets minus depreciation.

Sehwag: OK. Go ahead!

Sachin: As I said, it is in very good position with respect to assets and balances. But one thing that’s more important than that is zero debt which is great. Even the current liability is lesser than other companies. It has higher current ratio (Current Assets divided by Current Liabilities), higher operating margin, higher net profit margin, higher book value and higher EPS. So, INFOSYS is the leader among all the three in most of these parameters and I think my investment would make reasonable returns.

Sehwag: I am wary of stock markets. What if we fail?

Sachin: That’s funny. Do you go to the cricket match thinking that you would not score runs? No, right? You go to play good cricket and sometimes you score 100, sometimes you score 50 and sometimes you don’t score anything. That’s how life goes and you might not be successful all the time. But over long term, stocks will give you good returns just like the good average you and I have in Test Matches.

Sehwag: Great! I am now convinced and I think I am going to invest whatever I earn in this New Zealand tour in INFOSYS.

Sachin: Do not think I am recommending you to buy INFOSYS. I have provided you the facts and you can consider it after doing your own research. That way, you will also learn the art of investing and also be confident about your investments.

Sehwag: Thank you very much Bhaiya. Let’s go to the Hotel. We have the flight this evening.

Both left the place after providing good conversation for the readers to think about.


Note: I wrote this post based on the request of one Vamsi who worked in INFOSYS earlier. Hope he liked the analysis. As Sachin said in the conversation, INFOSYS beats the peers in almost all the parameters and that’s the reason it commands higher valuation than other companies. If you believe in Technology sector and you want to make decent returns over a period of time, then INFOSYS is the best bet.

Kumaran Seenivasan

12 comments:

Sunil,  February 25, 2009 at 1:41 AM  

Sir very good post?sir we would like to know how to read bal sheet,quarterly results...

Vamsi,  February 26, 2009 at 4:40 AM  

Hi Kumaran,

Thanks for the post and the good analysis provided.
Infy has ZERO debt but i have a doubt here, in general we consider having DEBT is a positive factor and the Debt of a company gives you an indication of its PAST and FUTURE plans ... correct? So, would there be any specific reason for Infy to maintain ZERO Debt? Just want to understand your view.

Kumaran February 26, 2009 at 6:12 AM  

Vamsi,

Your view point is true but it is not a necessary condition for all the companies. For example, Reliance Communications is a technology company but it requires huge investments for its growth and good service and thats the reason they spent around 25000 crore rupees even this year. Your view point applies to this type of companies or any capital intensive sector like engineering. But in INFY Case, the real capital is human talent and I do not see any huge investments other than that. May be the buildings and Computers. Thats why you might even see the value of fixed assets to be lesser than many other companies. If well establised software companies have huge debt even after earning 50% operating margin, then you should not even think about them. If these companies are capital intensive, then there is no way they can earn 40%-50% operating margin. So,in short investment is less and income is more for software companies and it is the other way for capital intensive sectors. In concept, what software companies do is simple. When you build the house, you give out the contract to a guy(Supervisor) and he employes people to get the work done and pays the salary and keeps the rest as a profit. Software companies does the samething. In my view, all our software companies are service providers and they just charge $35 per hour from the client and give "working" employees max $10 per hour and keep the rest. Ofcourse the middle level managers suck the blood and get paid more amount which they do not deserve.Hope that clarifies. Infact if you are talking about Microsoft or dell like companies then, your viewpoint would still apply as they rely mostly on innovation and they spend significant portion of their earnings to research and development. But INFY, WIPRO and TCS all service providers or operators.

BULLS February 27, 2009 at 1:51 AM  

Hello Mr Kumaran,

This is yet another instance of an excellent analysis provided by you in a 'simple' language, in form of an informal chat between 2 parties, as you did earlier.

My views on Large-cap IT stocks:

I, for one, prefer TCS over Infosys foing for the long-term call. Firstly, to start with Infosys is contemplating acquisition, with its huge cash on hand, since a long time... but is relatively sceptical to go for it unless they get it at very 'reasonable' price, of course along with a perfect match. In that they lost the race to HCL Tech very recently to acquire Axon on price bidding clause. Axon was regarded to be a good strategic fit & this could be affirmed by the company's initial show of interest in acquiring that company, but eventually withdraw due to higher bid from HCL Tech.

To narrate more on the same subject from yet another different perspective, they're more conservative in making buying decisions. Also, the company is quite sceptical when it comes to the aspect of their MARGINS. The company is not much willing to acquire new business opportunities at the cost of trifle let-go in their high margin of profits.

In longer-term, as and when the competition can only grow from here, the company may have to dilute by indulging in trifle lower margin business operations. Sooner or later, in future, the company's management will have to scale down their expectations. So, it would be better to start rather now than later.

Secondly, for the same above reason of maintaining higher profit margins, the company had till nbusiness opportunities within India. Most of such pie of domestic opportunties was welcomed by TCS. TCS share in domestic business has gone up very well in comparison to Infosys.

Also, the Infosys management had recently confessed that they are now vying for such domestic business opportunities as well. So, they are, indeed, late by a little in realizating the importance of domestic work. Though, this realization has come more on the back of SHARP FOREX FLUCTUATIONS in last 2 years or so.

Though, TCS does not baost of as good a balance sheet numbers & other cash flow situations as Infosys; TCS definitely scores on all the above mentioned aspects, which shall go a big deal in its long-term prospects.

Though, these all smaller pecking points may not be showing instant results in form of balance sheet visibility between Infy & TCS... But, in long-term business view-point, TCS has taken better steps than Infosys.

Alas, there is not much to choose between both the companies as of now, except that CURRENTLY Infosys is slightly better poised in terms of its financial numbers. But, you never know, after a few years, TCS may well grab the spot of best company from Infosys.

-BULLS

My Yahoo Mail & Chat id:
bull4bears@yahoo.co.in

Kumaran February 27, 2009 at 6:00 AM  

Bulls,Thank you for your comments. Its true that some of your points are valid. But I differ with the views about acquisition of other companies. I believe, INFY is looking for the right opportunities. It lost out to HCL just because they did not want to pay a higher price at this point of time. If times were good, I think they would have paid more.Because, whatever acquisition and mergers happened last year did not prove beneficial at least in the short term. Bad market sentiment can ruin the parent company sometimes. HCL managed well because, it does not enjoy the same Feel Good Factor and sometimes your low profile helps. But other points regarding domestic business and all, I agree with you and you are spot on.

Praveen February 28, 2009 at 1:03 AM  

hey its great way to put this analytical view... i m impressed

Faisal March 1, 2009 at 1:38 PM  

Hi Kumaran,
Just went through your new posts this weekend...I must say that each of them are great and written in so simple language that everyone can understand...I guess thats the best part...Anyways hope to see more posts in the future of same quality..

jamesvaikom March 3, 2009 at 1:39 AM  

sir,
One good quality i find in infosys is they don't waste money by sending annual reports or cheques by post. Some small companies even sent Rs. 10 cheques by postal.

Anonymous,  January 16, 2010 at 3:27 PM  

Hi Kumaran

WOW..its great way to put this analytical view... i m impressed

I have sold 2000 Shares Of Infosys ( Bonus Shares ) At Rs.11,000/- in early 2000 and Made Huge..Huge Profit...

Again I am buying Since 2008 ...In Deep Correction in Sensex...Not every day..Sorry i can not mention my name & E-mail ID...

You can call me 2010...

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nitisha singh June 15, 2012 at 5:58 AM  

What a lovely way of blogging! Thanks for it.But is the company info
of all the companies are same always?

Anonymous,  November 27, 2012 at 8:33 PM  

An intriguing discussion is worth comment. I think that you ought to
publish more on this topic, it may not be a taboo subject but usually people don't discuss such issues. To the next! Cheers!!
My blog post ; www.youtube.com

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