Saturday, May 30, 2009

Infosys - Stable friend

I have laid my hands on the current years Infosys balance sheet. As always it a joy to read for both the quantity and quality of disclosures.

Consolidated income has gone upto Rs 21693 crores a jump of 29.96% over the previous year. Net profit has grown to Rs 6828 crores from Rs 4941 crores a jump of 38%. The company continues to improve performance on all cost varaibales as a % of sales with operating profit at 34.08% . Sundry Debtor cycle has been bought down and stands at 16.7 % of revenues as opposed to 19.8% of sales last year.

EPS increased by 31.1% to Rs 99.76 per share from Rs 76.2 per share. Return on capital employed has improved from 41.38% to 42.9%.

Infosys continues to be a high margin high ROCE business with impeccable management track record. I see a few challenging years ahead but Infosys has the management and the organisational competency to ride thru this challenging phase.

A few other observations.

Cost of Capital
I had written last year about Infosys’s computation of cost of capital and the management decision to look at a minimum return of twice the cost of capital on average capital employed and thrice the cost of capital on average invested capital. The current cost of capital for Infosys is 12.18%. it has come down from 13.32% last year as Infosys has factored in 7% as return on risk free capital as opposed to 8% last year for computing cost of capital.

Dividend policy
The company has stated and is maintaining a dividend payout ratio of 30% of net profits which they has listed down as a strategy last year.

Cash on the balance sheet :-(
Cash and cash equivalents on the balance sheet have increased to nearly Rs 10000 crores which is invested in fixed deposits. This has been my only sore point with Infosys. I don’t get the logic on maintaining such high cash levels which is depressing ROCE.

Infosys management has always maintained that they would not be keen in looking at aggressive acquisitions to grow. It would invariably be niche acquisitions to fill skillset or geographical gaps. The business remains immensely profitable and throws out substantial amounts of cash every year. Infosys had also restructured its biggest cost variable - employee cost in the last downturn to incorporate a significant chunk of variable component in it to factor in significant downturns.
With so much buffer available in place I really don’t see the logic of maintaining such high cash levels. Ideally I would want the management to constantly buyback shares so as to reduce the equity base and improve EPS and ROCE.

I don’t even mind a lower dividend payout ratio and a higher share buyback program bcos share buyback is more tax friendly.

I continue to hold some Infosys shares and plan to retain them but not planning to add more as of now.

Saturday, May 23, 2009

Out of body experience

Wikipedia defines an “Out-of-body experience” (OBE or sometimes OOBE), is an experience that typically involves a sensation of floating outside of one's body and, in some cases, perceiving one's physical body from a place outside one's body.

The ability to stand away from oneself and watch ourselves and our behaviour in a particular situation.

I want to take extend this concept to a “Out of market” experience. Can we take ourselves out of the market and observe our own thoughts and behaviour at every stage of the market ?

A few months back everybody and their grandmothers were talking about a market which having jumped off the cliff was very likely to continue falling. To quote Munger “ The light at the end of the tunnel appears to be of the incoming train”.

I remember a few participants in the market talking about a bear market rally and I specifically remember Shankar Sharma doing it. His thought was that though we are in secular bear market there could be swift bear market rallies which could take the market up by nearly 50%. I was at that point wondering how do market participants behave in a bear market rally?. Wouldn’t the belief/ knowledge that it is a bear market rally curb the rally or does one tend to alter outlook when one reaches the situation?

This brings me back to my original thought of “ Out of market” experience. Can I at this stage take myself out of the exuberance that I experience right now seeing my stock go up 20% everyday and ponder?

Ponder on whether is the worst over or are we amidst a sharp bear market rally and the jump from the cliff has landed us with Alice in Wonderland.

For ppl who have had the privilege to watch Darby, Tigger & Pooh along with their children( I do with my daughter) it’s the time to move that finger to their heads and “Think Think Think”.

Bull Market Blogger

I am at a risk of being labelled as the “bull market blogger” who appears when the markets perk up and disappears as the down cycle starts :-).

I have been fairly irregular on the blog over the last few months primarily due to the fact that I had to make a choice between saving my business and saving my blog :-). Clearing business won over the blog.

Plan to write more often and provide a update on the past ideas that I had listed in the blog.