CategoryCompany analysis

As expected, infosys declared great results with q-o-q growth of 10 %. The annual guidance has been raised to Rs 90 EPS and the Total revenue guidance is 2.14 Bn USD.

The stock sells are around 2675 which equates to a forward PE of around 29.5.

I have always had a bearish opinion on the valuation from a long-term standpoint( analysing an IT services company and dollar-depreciation-will-stress-test indian offshore model ) . Some key concerns for me have been

• Sustainability of the 30 % + operating margins. Indian companies really don’t have patent on off shoring. Accenture and IBM are scaling up their Indian operations well. There very very few companies which have had such margins globally for a very long period of time ( Only monopolies like Microsoft )
• Impact of a dollar depreciation over long term on the profit margins
• Huge reliance on US for growth and revenue
• Cost pressures ( salary etc)

That said, my bearish viewpoint has somewhat reduced in the recent past. I was looking the financial numbers of Accenture. Accenture sells at around 25 usd and has a trailing PE of 14. The revenue numbers are around 15 Bn usd and the ROC capital for accenture is 50 % +.

If infosys were to continue to do well and eventually grows to the size of accenture ( and this is the big question ), then the current valuations are justified or the company is slightly undervalued. But if anything were to go wrong, like dollar crash or a recession or continued increase in the salary costs in the interim then the stock price could get punished.

Maybe worth holding onto the stock. But not worth selling ?

Ps : I own infosys stock ( used to work for infosys in the past )

Pidilite declared a 1:10 split recently. The stock market reacted favorably and has bid the shares to 93 (930 pre-split). The split is hardly a value creation event. Just divides the cake (or pizza if you like the analogy) into more slices. Really does not enlarge the cake. So the company now sells at a PE of 26. Definitely not undervalued …I would say overvalued or at best fairly valued

Time to look at selling the stock ?? I think so ….

P&G Hygiene just declared great results. I have always liked their business (I used to work in the FMCG industry and have seen their sales organisation closely). The topline growth is encouraging with good growth in the Vicks and Feminine hygiene categories.

As expected, cash flow from business is very good as the expense on the main asset – brands , is expensed through advertising. Fixed asset / Wcap requirements are low ( and asset are being worked more through contract manufacturing for the parent company ). The company has been declaring good dividends for quite some time.

The companies has a very clean balance sheet , just 80 cr worth of Fixed asset and 165 odd cr of WCAP (228 crs being cash , effectively meaning -ve working capital ) for generating almost 500 cr + net income. Net margins are in 15 % range ( compared to 7-9 % for the FMCG industry ). This shows that the company has good pricing power and sustainable competitive advantage and a very lean balance sheet.

The stock is pricey though, selling at a PE of about 30. I have looked at the company in the past but never bought it as it was not comfortable with the management. P&G global has opened a subsidiary which is not listed. P&G hygiene pays royalty to the parent ( whereas the indian shareholder pays for the advertising and brand building ). In addition all new brands are being introduced through the 100 % owned subsidiary.

Difficult to trust the management to be fair to the indian shareholder …they could pull a fast one like the other MNC of taking the company private and leaving the indian minorty shareholders in a lurch. Maybe i am being paranoid , but then there a lot of other companies to invest , so why take chances ..

Just saw pidilite industries results yesterday. The topline growth in consumer goods is still very strong ( 15% +). The industrial division continues to do well too. The bottomline was under pressure which i expected with the oil prices being high and one of the key raw materials being VAM which is dependent on crude prices.

Pidilite continue to do well, increasing market shares in the key categories ( i need to figure, how the new products are doing ).

The only worry which i have had with pidilite, which has prevented me from expanding on my holding, is what would the management do with all the free cash flows. The past record has been patchy. They have invested in windmills !! loaned to subsidiary companies and so on. somehow i have not been to been able to be comfortable on this factor.

But fundamentally the business continues to perform well

After the last post, i started analysing britannia further. Liked the following in the company then
– An ROE of 25 %
– almost zero debt
– growth in upper single digits
– A p/e of around 13
– Cash / investment on balance sheet of around Rs 100 / share
In addition the company has good brands, good marketing and distribution infrastructure and reasonable economies of scale.

However on doing a bit of detailed check , i realised that almost 40-50 % of the NP is other income from investment activities which makes the operating pe of almost 20-22 ( after

So the company no longer looks very cheap. in addition i cant get my hands around how the management proposes to use the cash flows. Its core business needs very little cash. They are doing buybacks …but not much ( share count has come down by some 5 – 10 % ). So the company seems to be piling cash and putting it into various investment.

now the above situation although not worrying , does not excite me into putting my money into the company. Most likely i will watch the company for some more time, before doing something

so i guess its time to move the next company !!!

A few years back i became interested in moser baer. This company seemed (on the face of it ) to be doing very well. It was getting into a product (CD) which was growing fast. The margins were great. The return on capital was high. The valuation looked great.

But then digging deeper, there were a few things which troubled

– was the depreciation enough to take care of the rate of obselence of the Fixed assets in the fast changing memory business
– how would the margins behave when 1) growth slowed down 2) the price deflation continued and accelerated ( memory prices have dropped by factor of 10 in the last 3-4 years )
– the business seems to be needing regular equity infusion for growth (maybe not important if the business is in high growth phase )

I was looking at the latest results and inspite of the topline growth the margins seem to be dropping. In addittion CD/DVD are getting cheaper by the month. so there is going to a constant pressure on margins. End of the day, it is a commodity business where the price of the product just keeps dropping. In addition , any new memory would require new captial equipment and hence more capital ( especially if it is a new technology )

So the business looks profitable , but if one looks closely ,the money coming out has a mirage like feel …you can see it , but never touch it