TCS VS INFOSYS – PICTURE ABHI BAAKI HAI MERE DOST

Everyone loves TCS right now and it’s almost fashionable to hate Infosys. Almost every second analyst would tell you there is a great pair trade in ‘Buy TCS, Sell Infosys’ and two weeks later would tell you ‘See I told you so’. So let’s just look at some of the numbers and emphasize the extent of TCS’s dominance over Infosys in recent times.

When TCS listed 8 years back, its market cap and valuations were around 20-25% lower to Infosys, which was well deserved despite TCS being the largest IT company by revenues even then. And that’s because Infosys had a long trading history – had been one of the blue eyed boys of the share markets and always deserved a premium over peers.

Over the next few years, Infosys and TCS were in a battle for the top market cap position in IT stocks and the lead changed hands some 4 or 5 times by 2010. It’s in late 2010, that TCS established a small lead and from that point on, it’s just been about TCS.

In late 2010, both TCS and Infosys had market cap of around Rs 1.75 lakh crores. As I write this, TCS has a market cap of 2.47 lakh crores and Infosys is struggling around 1.29 lakh crore mark. Yes, that’s a difference of 91%. In other words, TCS almost =Infosys+Infosys. TCS has more market cap than Infosys and Wipro put together. TCS has more market cap than the rest of the entire IT industry in India excluding Wipro. Yes, TCS is bigger than Infosys+HCL Tech+Tech Mah+Mah Satyam+what you have.

And look at the valuation difference – TCS now trades at 18.5x one year forward earnings while Infosys is available at 13.5x one year forward earnings. This is a valuation gap of 37%, highest ever enjoyed by TCS. So why is the market still so bullish on TCS and so negative on Infosys? Well, for starters, currently Infosys is not seen as a company that under promises and over delivers as was the case till 2010. For last 2 quarters, it’s under promising and hugely underperforming even that promise. The market didn’t like it one bit that they have not given Q2 guidance. If there was one parameter which used to distinguish Infosys over TCS, it was the ability of the management to stick its neck out and give guidance.

But that’s just one part. Look at the quality of earnings and the difference here in the data, apart from the obvious dollar revenue difference which has been the research work of my colleague Diana Monteiro. So while TCS has delivered 3% dollar revenue growth, Infosys has seen a contraction of 1%. TCS has seen a volume growth of 5.3%, while Infosys has seen only 2.8%. Pricing is down 1% for TCS, it’s down almost 4% for Infosys. Attrition is at 12% at TCS and is at almost 15% at Infosys. Go to IITs and there is clear preference for TCS over Infosys from students. What was inconceivable a few years back is now a reality. Lot of students are not even applying for a job in Infosys.

Last quarter, I saw HCL Tech’s CEO almost take a dig at Infosys and their strategy. This quarter TCS has come out with numbers on same day as Infosys. Of course this could be a coincidence or it could be the TCS management way of telling the world, who the boss really is. But as I said in my opening lines, it’s now almost a fashion to bash Infosys and praise TCS. But before you pronounce the death of Infosys, just remember this..........

Infosys is up almost 5525% in last 15 years. In 1997, if you had invested Rs 1 lakh in Infosys, it would be worth Rs 56 lakh now – tax free since its long term capital gain. I am no expert in predicting future earnings but it only takes 3-4quarters for sentiment to change at times. For now, one thing is certain – the large shareholders still believe in Infosys. Despite all its problems, 3 of the largest investors in company viz LIC, Aberdeen and Oppenheimer have actually upped their stake in the last quarter. This quarter’s data will be key to watch out for, 3 months from now.

But this is not a 3 month or 6 month game. This is a long term story. Let’s look at these numbers again in next 5 years. As I said, picture abhi baaki hai mere dost.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options given to him by his previous employers as part of his compensation

WHY DO REFORMS EQUATE WHAT CAPITAL MARKETS WANT?

The market is getting excited; the PM in FM’s role may be on reform path. Really, but what is reform? A steep power tariff hike, or may be a steep diesel price hike?, or may be FDI in aviation, retail, what else? May be double the prices of water being supplied at our home?

Why do we confuse reforms with what capital markets want? Why should you be happy that someone who is already fighting a 10% inflation, has to pay 24% extra for power tariff and that too without the guarantee that the power supply will be uninterrupted or the fact that he may be paying for double of his actual use because of power theft?

Why are the brokerages sulking over petrol prices being cut? Despite the fact that price cut is in no way in sync with the collapse in global crude prices (even in Rupee terms let me say before the usual defence of OMC is spoken up). And worse still why is everyone calling for a steep diesel price hike even after this collapse in crude?

The simple answer is these are relatively easy to predict, easy to call and have direct impact on stock prices. A head of research at a brokerage earns over one crore as salary. He doesn’t mind paying 100 bucks a litre for petrol – but he will be happy if BPCL or HPCL rally by 100 bucks – that would make him much happier.

But should it all be about stock markets? Or let me actually rephrase that – should stock markets only be happy if prices go up? Can we look at a situation where Indian companies make big profits at current prices or may be even lower prices? And that too with a much lower state subsidy burden?

Why is no one questioning the efficiency of the system? Can we improve the absolutely inefficient way some of these companies, especially PSUs are being run? Can we look at a situation where coupled with this improved efficiency, and a sheer economy of scale, some of these companies make much more profits at current prices than asking for a price hike all the time? 

Make no mistake – we are a poor country. The divide between rich and poor is only getting wider and at some point, this greed has to stop. We are making some necessities of life completely out of reach of a vast majority of our population.

Cement cartelisation or bull cartel?

Now, this is amazing. For last 10 days, one report has consistently appeared in either business channels or pink papers - CCI to come out with massive penalties for alleged cartelisation. For the uninitiated, CCI stands for Competition Commission of India - an institution I have zero respect for, because if it was doing its job properly, the first ones to be penalized would have been the oil marketing companies, which are blatantly indulging in cartelisation. Anyways, that's a separate angst and I would deal with that later.

I am not even discussing the merit of a cement cartelisation or a probe here. I am just presenting some plain facts. Now this sword has been hanging for around a month and normally you would expect such stocks to collapse, given the nature of penalties being talked about (50% of last year's profit in some case). But look at what has happened over the last one month.

Ambuja Cement is up 22%, ACC is up 11%, India Cements is up 10% and JP Associates in up 15%. At a time, when the market has been rangebound, or may be has gained 3-4% and coming at the time of monsoon, when normally investors avoid such stocks.

There is another statistic. In 10 days, we have seen Ambuja adding over 50% positions in futures' Open Interest and ACC has added around 25%. Again for the uninitiated, its the directional position you take if you are either bullish or bearish on the stock. Logic says if a stock is up 20% with 50% Open Interest jump, these positions are long in nature.

And now the most interesting and compelling stat. I have just observed the intra-day pattern of cement stocks and since Ambuja is the most liquid one, just look at the following pattern

12th June: Opens at 149.50; closes at 158.50; intra-day move of 6%
13th June: Opens at 158.6; closes at 153.55; intra-day move of 3%
15th June: Opens at 163.5; closes at 169; intra-day move of 3.5%
19th June: Opens at 164.3; closes at 173.35; intra-day move of 6%
20th June: Opens at 166; closes at 176; intra-day move of 6%

And the genral pattern is that stock opens 3% lower and ends 3% higher with some report of "CCI order today" appearing somewhere. And keep in mind, these are derivative stocks, where nowadays you can play stocks in intra-day trade with as low as 8-10% initial margins. So potential return is as high as 60% with a 6% intra-day move.

Some of these reporters are honest and young and will learn with time on how not to allow themselves being used by some market operators. But the sheer price move over a month and intra-day moves suggests we need to worry more about bull/bear cartel rathen than cement cartelisation.

Disclaimer: This is my personal opinion. I am writing on the basis of what I have seen on screen.

REVISITING SBI

Before I begin this post, I would like to revisit one of my earlier posts and at the cost of sounding a bit immodest, things have indeed panned out like I expected

http://themarketinternals.blogspot.com/2011/02/have-banks-bottomed-out.html

From this post, I would just like to highlight the following bit.

Feb 21, 2011

The only reason I am uncomfortable with this cheap valuation argument is the fact that the current scenario is looking a bit like early 2008, when we had the big inflation scare led by Crude’s surge towards $140/bbl. It’s worth noticing that from Jan 2008 to April 2008, the SBI stock fell from 2463 to 1605. From FY09 book value perspective, the P/BV fell from2.3x to 1.5x. It then had a brief rally towards 1795 and it looked like bottom was in place, and then we had that big fall to 1078, taking its P/BV to 1x. Under current circumstances, a 1x P/BV would be if stock hits 1850. I am not saying this will happen, just saying it can happen.

Ok now what? SBI indeed breached 1850, in fact even lower than that, which just goes on to prove that you should not believe in this myth that any 20-30% correction in a blue chip is a great buying opportunity. The big question now is whether one could buy SBI now?

To be fair, the stock of SBI has had a decent rally over the last week and the trading move well may have been over as I write this. While it’s tough to be bearish on India’s largest bank after the stock has halved from its peak, but it’s equally tougher to be bullish on it either in current environment.

The biggest concern for me on SBI is the way it is being handled. Two weeks back, there were reports that LIC would be told to buy equity stake in Kingfisher and of course if that has to take place, SBI has to go in for a loan deal for Kingfisher which may not make business sense. So while SBI is country’s largest bank and has a great branch network with highest penetration, the biggest worry is will it be allowed to operate as an independent financial institution?

If the answer to the above query is No, then there are troubles which lie ahead. We have seen SBI maintaining that Air India is still a standard asset for them and recently all lenders have agreed to rejig the debt plan of the troubled Airline. What if Kingfisher’s debt restructuring is next?

Now SBI has exposure of Rs 1200 cr to Air India and Rs 1400 cr to Kingfisher. For a bank with a balance sheet of over Rs 12 lakh crores, these are peanuts, but in a larger scheme of things, some of the bad assets are sufficient to eat out an entire quarter of profit as we saw in Q1 of the current fiscal and a bit of that in Q2 as well.

So what next for SBI stock? Well, with the limited knowledge of banking sector, I can say with fair degree of conviction that its highly unlikely that SBI goes to 2500 in near future. For that too happen, it has to deliver 2-3 quarters of stable earnings and prove to the market that the worst of asset quality is behind. On the other hand, once this global cheer settles and markets are back to reality, there is a good chance that market would again focus on the asset quality and headwinds facing SBI and you cannot rule out the stock testing say 1500 mark. So for me, the risk on downside is slightly more than upside.

The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options given to him by his previous employers as part of his compensation

A WATERSHED EVENT COMING OUR WAY

Coal India is set to become India's most valued company and this watershed event may come as early as today. If Coal India rallies 2% and RIL is flat or negative, Coal India's market capitalisation would exceed Reliance. Yes, however surprising it may appear, that's been the extent of Reliance's capitulation and Coal India's rally. And for the first time since February 2007, Reliance will relinquish it's top position and it's an irony that it will lose it to a PSU having wrested it from another heavyweight ONGC, back in 2007.

There are couple of lessons the Government can learn from this. Since the day of Coal India listing, Nifty is down nearly 19%, yes it made its yearly peak on the next day of Coal India listing. During the same period, Coal India is up 57% if counted from the IPO price and is even up 13% if counted from its listing price. So a retail investor who managed to get allocation (and that too at 5% discount) is making 65% returns and even one who bought on its listing is making a healthy 13%, in a market which has collapsed 19% during the same period.

So the lesson number one the Government should learn is to come out with initial public offers (IPOs) of quality PSUs at a price which is so attractive that it brings a whole lot of investors to the primary market. The last time such an instance happened before Coal India was NTPC (the IPO of 2004, not the farce FPO last year) and that's what made a lot of money for small investors and actually attracted them to the primary market. At the end of the day, a retail investor would always prefer primary market if a good quality issue is offered at an attractive price. You don't want the situation of an NHPC where the stock is down over 30% from IPO price.

What's the second lesson here? I would go back to the event when Reliance took the top spot from ONGC. There was a time in 2004-2005 that ONGC's market value was double that of Reliance and we all know what happened after that. Reliance left it far behind and it's only recently that ONGC has even come into reckoning due to the collapse of Reliance's stock price. So the Government should draw a lesson that it has to protect the interests of its own blue chips. Of course the larger interest remains public welfare and it should do what it has to do to protect the rights of citizens of the country even at the cost of value erosion for some of these PSUs, but in that case, it should not look at listing such PSUs in the first place.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation. Please consult your financial advisor before acting on any piece of advice in this article. This article should be used as only one of various parameters before making an investment decision.

FED IS THE PROBLEM, NOT THE SOLUTION

Well the last few days have been extremely volatile and the volatility has been sharp enough to scare most of the retail participants. And the big question now is, whether the time to buy Indian equities is now, or should one wait further?

Now, US markets had a big rally overnight, after the Fed said that the near zero rate scenario will continue till at least mid-2013. That’s 2 years from now!! It just shows the desperate state Fed is in and unlike the RBI; the Fed will do what markets want it to do. The key to gauging the next move for market is to identify whether the texture of the market will be Sell on rally or bottom fishing.

Now, all of us need to understand one point, while day-to-day moves are something nobody can predict, it will be foolish to just conclude a perfect correlation between Dow and Sensex for a medium to long term as has been proved time and again over the last 5 years and something that will be proved again over the next 5 years. So with that in mind, anyone making an investment decision (not a trading decision) has to keep India’s own fundamentals in mind and that’s been the biggest reason for India’s underperformance this year, even before the global mayhem began.

The biggest game changer for Indian market has been the hawkish stance taken by the RBI which is somewhat justified by the high and sticky inflation. Now the 2 big factors for this high inflation have been high commodity prices, crude in particular and very high food inflation, driven by supply constraints, a buoyant economy and to some extent, the rampant corruption.

Now the food inflation is unlikely to come down to comfort zone soon, that’s a new reality that we have to live with. India’s economy remains strong, the middle class is getting richer and the demand for good quality food far exceeds supply and unless we attack the supply side constraints and have another food revolution, this inflation will remain sticky.

As far as oil is concerned, while all of us want to see it come down and fundamentally it should come down considering the kind of demand-supply scenario, unfortunately that may not be the case. You may continue to see massive corrections like the one witnessed earlier this week but it’s dangerous to assume a total collapse of crude and that’s what I mean by the title of my article. The simple fact is the Fed will have to come out with QE3. Having kept markets on a ventilator for so long, it can’t withdraw that when ostensibly the patient is in worse condition than it was at the beginning of QE2.

And with QE3, you will again see a lot of froth in speculative assets led by liquidity, crude included, may be even emerging markets including Indian gaining a slice of that. And while for the short-term that will result in great trading gains, you will always feel uncomfortable at the pit of your stomach about the next phase for equities. The best scenario from an Indian perspective will be if Fed comes out, takes a firm stand and says, there will be no QE3 as that will serve nobody and that the economy has to revive on its own even if it means 2-3 quarters of pain. That would mean a collapse or topping out of crude/commodities and the beginning of a healthier bull market in India.

The one asset class which has been outperforming everything else is gold and in there lies a lesson for times like these. In a time where governments and central banks keep printing money unabated, the world will look for a new currency, one which cannot be printed, which is limited and which is valued and there is absolutely no doubt that gold represents that.

For an average retail investor, the time to bottom fish may not have come. Please don’t be under an illusion that just because a stock has fallen 50%, it represents value. As 2008 taught us, a stock can fall 50% after falling 50% and then another 50%. So unless you have a 5-10 year view, where you buy fundamentally strong stocks and don’t let the fluctuations affect you, this may not be the best time for you and chances are you will get better prices. Just keep your shopping list ready though.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation. Please consult your financial advisor before acting on any piece of advice in this article. This article should be used as only one of various parameters before making an investment decision.