IT sector stocks – The Elephant can Dance V2

Date: 24th May 2012

This update of the April 19 article by JainMatrix Investments includes FY12 results of all three firms.

A comparison of top Indian IT stocks, Infosys, TCS and Wipro throws up some interesting insights. Infosys, the long time leader and IT bellwether, is losing its pace of growth. It is still ahead in terms of Valuations and Margins. However, TCS has handled the difficult business environment the better, and has accelerated EPS in the last 3 years.  The Elephant can Dance – Hail the new leader – TCS

Query

One of the Subscribers on JainMatrix Investments raised a query – here it is:

Hi Punit, I have a question about the IT sector stocks. I own Infy, TCS and Wipro. How can I evaluate which one is better? From the share price trend over few years, TCS has performed the best. What are the other parameters to check and which is best according to you? I would ideally want to sell two of them and have only one, so not sure which is the best. Regards, S.

I would like to dedicate this post to answering this question.

Introduction

Of these three, Infosys is of course the bellwether – the traditional indicator of the health of the sector. TCS in the 8 years since the Aug 2004 IPO has shown healthy growth, and finally Wipro, the soaps to software conglomerate is also a top player. Today’s Market Prices of these are: Infosys 2380, TCS 1221 and Wipro 392

1.     Five year snapshot of key financials

Let us first look at a 5-year snapshot of financials of the three. This can give us good visual feel of the relative and absolute financials of the three.

Infosys: 

Infosys Financials - JainMatrix Investments

Infosys Financials – JainMatrix Investments – Click to enlarge

TCS:

TCS Financials - JainMatrix Investments

TCS Financials – JainMatrix Investments

Wipro:

Wipro Financials - JainMatrix Investments

Wipro Financials – JainMatrix Investments

2.    Detailed Comparison

Next we will look at a detailed comparison of the firms in terms of valuation, growth characteristics, debt, shareholding pattern, etc.

See LINK (thanks to Edelweiss Financials for the excellent data). We can see from this analysis that on 5 important parameters:

  • Valuation – Wipro is now the cheapest, TCS most expensive
  • Growth – TCS is better of our three
  • Management effectiveness – TCS clearly leads
  • Solvency and Margins – Infosys clearly leads
  • Market performance – TCS clearly leads of our three

A copy of this data is available below – dated 24th May ’12.

IT Sector Performance Snapshot - JainMatrix Investments

IT Sector Performance Snapshot – JainMatrix Investments

3.     Key Trends in Price and Earnings 

Finally, let us look at a 5-year snapshot of Price, P/E and EPS of the three stocks, from my charts.

The Infy Price and PE Chart indicates that the PE has averaged 21 in the last 5 years. After the recent results, it has fallen sharply. Currently it is at a discount to this average.

Infosys:

Infosys Price and PE Chart - JainMatrix Investments

Infosys Price and PE Chart – JainMatrix Investments

Infosys Price and EPS - JainMatrix Investments

Infosys Price and EPS – JainMatrix Investments

TCS:

TCS Price and PE - JainMatrix Investments

TCS Price and PE – JainMatrix Investments

TCS Price and EPS - JainMatrix Investments

TCS Price and EPS – JainMatrix Investments

Wipro:

Wipro Price and PE Chart - JainMatrix Investments

Wipro Price and PE Chart – JainMatrix Investments

Wipro Price and EPS Chart - JainMatrix Investments

Wipro Price and EPS Chart – JainMatrix Investments

The Decision Table:

Finally, the decision is made by comparing the 5-year CAGR growth on key parameters:

IT Sector Decision Table - JainMatrix Investments

IT Sector Decision Table – JainMatrix Investments

Notes: PE is as on 24th May

Conclusions:

1.      The Elephant can Dance – Hail the new leader – TCS

  • The largest player, TCS, leads on Growth, Management Effectiveness and Market Performance. In the Decision Table, it leads on EPS, Revenues, EBITDA and PAT. Market Price and Valuations reflect this leadership.
  • Valuations wise TCS is more expensive than Infosys, but note that the consistent leader will always command premium valuations, as Infosys had till 3 years ago.
  • The past 3 years have not been the best of times for the IT industry, but the performance from TCS should get better as the developed economies recover
  • Clarity in leadership plan and strong leaders helps in many softer aspects such as Acquisitions, new business lines and corporate aggression. TCS also scores here.

2.      Infosys remains a defensive play

  • Infosys leads on parameters like Valuations and Solvency & Margins. In the Decision Table on Valuations, it is the cheapest of the three.
  • Perhaps the superior margins that Infosys commands has clashed with poor market conditions in the developed economies.
  • It does not help that there seems to be a lack of top-notch leaders in the firm. This is a legacy issue, with the old promoters team calling the shots, rather than proven professionals.
  • Infosys does not have a good record in acquisitions.

3.      Wipro is recovering from a couple of top management changes

Wipro has not yet shown clear directions and results. It is neither a growth not a margins leader. This may change soon, but until then, it will be rated third of these three.

Dear S,

Based on the analysis done, I would put my money on TCS.

My recommendation is to transition smoothly, so try to switch from others to TCS over a period of 3-6 months, selling others monthly and simultaneously buying TCS.

Warm regards and profitable investing,

Punit Jain

JainMatrix Knowledge Base:

See other useful reports in related sectors

eClerx Services, A Profitable Process – Click LINK

………………………………………………………………………………………………………..

Disclosure and Notes: 1) It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it. 2) The above financial investigation is not comprehensive, but a short and sufficient study.

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/

IT sector stocks – The Elephant can Dance

Viewers may prefer to see the latest May 2012 version of this report at LINK

Date: 19th April 2012

One of the Subscribers on JainMatrix Investments raised a query – here it is:

Hi Punit, I have a question about the IT sector stocks. I own Infy, TCS and Wipro. How can I evaluate which one is better? From the share price trend over few years, TCS has performed the best. What are the other parameters to check and which is best according to you? I would ideally want to sell two of them and have only one, so not sure which is the best. Regards, S.

I would like to dedicate this post to answering this question.

Introduction

Of these three, Infosys is of course the bellwether – the traditional indicator of the health of the sector. TCS in the 8 years since the Aug 2004 IPO has shown healthy growth, and finally Wipro, the soaps to software conglomerate is also a top player. Today’s Market Prices of these are: Infosys 2380, TCS 1091 and Wipro 421

1.     5-year snapshot of key financials

Let us first look at a 5-year snapshot of financials of the three. This can give us good visual feel of the relative and absolute financials of the three. (Note that as of today we do not have Q4 FY12 data for TCS and Wipro, so I have only included the data till Q3 FY12 for all shares, for the comparison)

Infosys: 

Infosys Financials, JainMatrix Investments

Fig1 – Infosys Financials, Click on image to enlarge

TCS:

TCS Financials, JainMatrix Investments

Fig 2 – TCS Financials, Click on image to enlarge

Wipro:

Wipro Financials, JainMatrix Investments

Fig 3 – Wipro Financials, Click on image to enlarge

2. Detailed Comparison

Next we will look at a detailed comparison of the firms in terms of valuation, growth characteristics, debt, shareholding pattern, etc.

See LINK (thanks to Edelweiss Financials for the excellent data). We can see from this analysis that on 5 important parameters:

  • Valuation – Infosys clearly leads
  • Growth – TCS is better of our three
  • Management effectiveness – TCS clearly leads
  • Solvency and Margins – Infosys clearly leads
  • Market performance – TCS clearly leads of our three

A copy of this data is available below – dated 20 April ’12.

Performance snapshot, JainMatrix Investments

Fig 4 – Performance snapshot, (Edelweiss), Click on image to enlarge

3.     Key Trends in Price, P/E and EPS

Finally, let us look at a 5-year snapshot of Price, P/E and EPS of the 3 stocks, in my charts.  (As of today, we do not have the Q4 FY12 data for TCS and Wipro, so I have projected approximately the EPS for Q4 ’12. This data may change in a few weeks).

Infosys:

Infosys Price and PE, JainMatrix Investments

Fig 5 – Infosys Price and PE, JainMatrix Investments

Infosys Price and EPS, JainMatrix Investments

Fig 6 – Infosys Price and EPS, Click on image to enlarge

TCS:

TCS Price and PE, JainMatrix Investments

Fig 7 – TCS Price and PE

TCS Price and EPS, JainMatrix Investments

Fig 8 – TCS Price and EPS

Wipro:

Wipro Price and PE, JainMatrix Investments

Fig 9 – Wipro Price and PE

Wipro Price and EPS, JainMatrix Investments

Fig 10 – Wipro Price and EPS

The Decision Table:

Finally, the decision is made by comparing the 5-year CAGR growth on key parameters:

IT Sector Decision Table, JainMatrix Investments

Fig 11 – IT Sector Decision Table, JainMatrix Investments

Notes: PE is as on 17th April

Conclusions:

1.      The Elephant can Dance – Hail the new leader – TCS

  • The largest player, TCS, leads on Growth, Management Effectiveness and Market Performance. In the Decision Table, it leads on EPS, Revenues, EBITDA and PAT. Market Price and Valuations reflect this leadership.
  • Valuations wise TCS is more expensive than Infosys, but note that the consistent leader will always command premium valuations, as Infosys had till 3 years ago.
  • The past 3 years have not been the best of times for the IT industry, but the performance from TCS should get better as the developed economies recover
  • Clarity in leadership and strong leaders helps in many softer aspects such as Acquisitions, new business lines and corporate aggression. TCS also scores here.

2.      Infosys remains a defensive play

  • Infosys leads on parameters like Valuations and Solvency & Margins. In the Decision Table on Valuations, it is cheaper than TCS.
  • Perhaps the superior margins that Infosys commands has clashed with poor market conditions in the developed economies.
  • It does not help that there seems to be a lack of top-notch leaders in the firm. This is a legacy issue, with the old promoters team calling the shots, rather than proven professionals.
  • Infosys does not have a good record in acquisitions.

3.      Wipro is recovering from a couple of top management changes

Wipro has not yet shown clear directions and results. It is neither a growth not a margins leader. This may change soon, but until then, it will be rated third of these three.

Dear S,

Based on the analysis done, I would put my money on TCS.

My recommendation is to transition smoothly, so try to switch from others to TCS over a period of 3-6 months, selling others monthly and simultaneously buying TCS.

Warm regards and profitable investing,

Punit Jain

………………………………………………………………………………………………………..

Disclosure and Notes: 1) It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it. 2) The above financial investigation is not comprehensive, but a short and sufficient study.

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/

The Demographic Dividend in India

And how you can profit from it.

Get my reports and articles first, right in your inbox – subscribe for free to this blog, on the right hand side panel. 

We’re hearing the term ‘Demographic Dividend’ bandied about quite a bit, when describing India. What does it mean, and what are the implications?

What’s happening here?

In the last 10 years India has added 181 million people to its population. The population of India, at 1,201 billion, is almost equal to the combined population of the US, Indonesia, Brazil, Pakistan, Bangladesh and Japan put together (1214.3 million).

A news report – India will account for the highest working age population in the next 10 years, the International Labor Organization (ILO) has said in its report. And … between 2010 and 2020, the working age population between 15 and 64 years in a group of countries will increase by 212 million and “over 64 per cent of the increase will occur in only one country – India.”

India is going to experience this Demographic Dividend (DD) over the next few years. This has a few different forms and implications.

  • A large number of people will enter the working population age, providing labor availability across skill sets – unskilled to highly skilled industries and jobs
  • There will be fewer kids per family. This means families will upgrade lifestyles, providing better food, education and medicine to the fewer family members. Also, more women will enter the workforce in this period.
  • In the working age of 20-60, people save more, and the economy has more resources freed up to invest in productive loans, projects, infrastructure and industrial asset creating.

How do you as an investor gain from this?

The Demographic Dividend in India is both a risk and an opportunity. As an investor, your best way to play this trend is to look for the winners on the economic industrial landscape that will gain from this.

Here is a group of firms – some winners, some not.

Sector/ Stock Likely Trends and Outlook
Banks Larger Banks are plays on the overall economy. Reserve Bank of India, the regulatory authority, expects average industry growth rate to be 20% during FY11.The banks sector will gain tremendously from the DD.
  • HDFC BANK
This fast growing bank combines rapid credit growth with high asset quality, hurtling ahead with 30% year on year growth on key parameters. More people with jobs and salaries and growing businesses means continued growth for HDFC Bank.
  • ICICI BANK
This bank has emerged from a two-year cleansing up of its balance sheet, and has vowed high growth balanced with better asset quality. It already has the widest reach across India in terms of Bank branches. Looks certain to gain from DD.
  • Yes Bank
Yes Bank is an aggressive high potential new generation bank. The recent fall in prices by 28% makes this an attractive entry point for long-term investment. See article – Note on Yes Bank
InfoTech/ IT software Indian software services firms started off looking for business all over the world, riding on technology staff shortages and cost arbitrages. The newer trend is to move up the value chain and strengthen sales & marketing in India, to ride on a maturing domestic industrial and services base.
  • INFOSYS Technologies
This large, well-managed Indian software services firm will gain from DD in the form of controlling costs of skilled software resources. INFY reaches out far and wide across India, hiring top talent. They also come closer by setting up in smaller towns, offering better working conditions, while servicing global customers.
  • WIPRO
Wipro reaches out to customers offering the full suite of software services, BPO and engineering solutions. Expected to gain from DD in terms of controlling resource costs and domestic business growth.
  • (iGate) PATNI COMPUTERS
This firm has been among the larger players in Indian software services, but has not seen the scaling up associated with the other top players. Nor been able to grow fast in new locations in India. But the acquisition by iGate should see a reversal, and improve the long-term prospects. But in the next 1-2 quarters, there will be higher costs of integration and attrition, before the dust settles.
  • MAHINDRA SATYAM
With a corporate restructuring and change of ownership behind it, this firm will hope to resurrect its battered reputation over the next few years. The wheels of justice grind slowly in India, so there’s still uncertainty in the air.
Others
  • TATA MOTORS
This India based automobile major has extended its business from trucks and commercial vehicles a decade ago to passenger cars and SUVs, as well as acquired the marquee brands of Jaguar Land Rover. This acquisition looked expensive 2 years ago, but displayed a stunning turnaround last year.The innovative ‘Tata Nano’ project has stabilized and will gain from DD, offering an affordable safe transportation to middle class Indians. Export plans look feasible and profitable.A slew of new product launches in the commercial vehicles in India helps Tata Motors maintain an astonishing 65% market share in the category. DD drives increases in logistics investments, and TTM is the leader here.Global plans, good technologies and the Indian manufacturing base can make TTM an understated global leader of the future.
  • DR REDDY
DD for the Pharmaceuticals sector is very positive as a lot more people spend a lot more on healthcare & medicines. For RDY, rapid growth in domestic business shows this firm is on top of DD trends. RDY should also gain from M&As in a very fragmented domestic industry.Growth from exports also shows the firm is gaining from Indian industry advantages – like lower cost of manufacture, as well as the market opportunity from a number of blockbuster drugs in developed markets going off patent.Recent acquisitions are aimed at growing the global generics business.
  • Petronet LNG
Petronet LNG is a gem of a stock that has given equity investors safe and high returns for the last 7 years.See link – Note on Petronet LNG
  • Bharti Airtel
Bharti is the top telecom company in India by revenues and market share. It has weathered the storm of hyper competition of 2008-10 like a leader, maintaining prices, and signaling the reversal in 2011. It’s a cost and efficiency leader, also pushing into new businesses like DTH, Telemedia (broadband, IPTV and fixed line) and Enterprise (end to end telecom services). With it’s acquisition of Zain, it has now got access to the growth engine of the next decade – Africa.  See link – Note on Bharti Airtel

Some of the above firms will certainly continue to win in the next decade.

Happy investing!

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/