While attending Infosys's (INFY) earnings call, I got a feeling that the management was playing defense and hence was cautious about future guidance. Even though the company achieved another milestone of hitting $1bn in revenue per quarter, the mood amongst the analysts was not enthusiastic.

NOTE : As the Income statement and balance sheets are not completely visible in this blog, to get a better view them, click on this link.

Quarter Highlights:

Other than its market cap being lower than its book value, I was attracted by Presidential Life insurance (Ticker : PLFE) because its CEO is a 87 year old guy who is still going strong. Herbert Krutz has been the Chairman and CEO of the company since 1977.

This is one of the first pure Life insurance and annuity business that I have analyzed. So it has been a great learning opportunity for me to understand the uniqueness of this industry. The Insurance Company currently emphasizes the sale of a variety of single premium and flexible premium annuity products. Each of these products is designed to meet the needs of increasingly sophisticated consumers for supplemental retirement income and estate planning.

Agilysys (AGYS) has been undergoing great transformation for few years. The sale of KSG to Arrow Electronics for $485mn marked a major milestone. With this hoard of cash under its belt, the company has been in a buying spree to acquire domain-rich companies that would contemplate their goal of being a major computer solutions provider to enterprises.

What are the company’s new goals?

With the sale of KSG, the company has established the following long-term goals:

Grow sales from approximately $500 million to $1 billion in two years and to $1.5 billion in three years. Much of this growth will come from acquisitions.

Target gross margins in excess of 20% and earnings before interest, taxes, depreciation and amortization of 6% within three years.

While in the near term return on invested capital will be diluted due to acquisitions and legacy costs, the company continues to target long-term return on capital of 15%.

Great increase in Goodwill:
With recent acquisitions of InfoGenesis, Stack and Visual one. The company’s goodwill has jumped from $93mn on Apr-1/2007 to around $191mn on June-30/2007. The following have been major acquisitions in the recent past. Its book value though remains around $600mn. It is very important to analyze in detail how these new acquisitions justify their high prices.

The other day I got a note from an analyst who was researching the Indian BPO sector and wanted my independent opinion as to which stock is better: WNS Holdings (WNS) or EXL services (EXLS). To be honest I have no inclination towards either of them. You must have seen that in my last post where I branded both of these businesses as "What if your customer wants to buy your business?" The contacts they have with their leading customers give them an option to buy back part of the business that caters to their needs.

But I still gave a second look at both the stocks and came up with following observations.

Exlservices holdings (EXLS) is one of the upcoming BPO companies. Unlike other BPO heavyweights like Genpact (G), it was not started as a backoffice of a MNC. Instead it was started in 1999 by a group of experienced professionals including Vikram Talwar and Rohit Kapoor.

Vikram was then the CEO and Managing Director of Ernst & Young and Rohit managed international investments for clients at Deutsche Bank. In August 2001, Conseco acquired EXLS and operated it as its wholly owned subsidiary. Later, in November 2002, Oak Hill Capital Partners L.P. and FTVentures along with some members of our senior management team bought EXLS from Conseco, making it a third party pure-play business process outsourcing service provider.

In June I had posted an article "Why is Accenture's market cap less than that of Infosys."

There was a lot of debate as to what is the correct market cap of Accenture. All of us were giving our own versions , but ignored as to what the first page of the 10-k report says.Following is what it says about its market cap right in the first page of its 10-k report.

Since Wipro (WIT) announced its acquisition of Infocrossing, analyzing Infocrossing's 10-k report was one the items in my to-do list. The following are some important points I found out about this infrastructure-cum-health care BPO company. Infocrossing's (IFOX) biggest asset is its data centers that it uses to manage its customers IT infrastructure, which mostly consists of mainframes, Unix and linux servers. The company has grown organically as well as through acquisitions.

Blackbaud (BLKB) is the global provider of software, and related services that are specifically designed for non-profit organizations. It helps non-profit organizations increase donations, reduce fund-raising costs, improve communications with constituents, manage their finances, and optimize internal operations. It has focused solely on the non-profit market since its incorporation in 1982. At the end of 2006, it had approximately 15,500 customers, of which 97%, or almost 15,000, paid annual maintenance and support fees. Its customers operate in multiple verticals within the non-profit market including religion, education, foundations, health and human services, arts and cultural, public and societal benefits, environment and animal welfare, and international and foreign affairs.

Non-profit organizations employ 7.2% of the U.S. work force, a figure that increases to 10.5% when volunteer labor is included. Donations to non-profit organizations in the United States were $260 billion in 2005, and have increased almost every year since 1962. According to Giving USA, the compound annual growth rate over the past ten years was 7.5%. In addition, these organizations receive fees of approximately $850 billion annually for services they provide. Worldwide, non-profit organizations employ more than 25 million people, and account for $1.3 trillion in total annual expenditures, according to the Johns Hopkins Nonprofit Employment Data Project.

WNS Holdings (WNS) was established as a back office branch of British Airways (BAIRY.PK) in 1996.The company since then has grown into a seasoned BPO player specializing in airlines and auto insurance claims. Its people are not only trained in managing the back offices of their customers, they also handle auto claims that include payments to the local car repair shops.

The company is incorporated in Jersey, Channel islands. Don't confuse it with New Jersey!!!.

On Friday, August 22, while discussing Perficient’s business strategy and growth plans with Mr. Jack McDonald (Chairman and CEO of Perficient), I learned of a $20bn niche IT consulting market that deals with project consulting for small initiatives at large IT shops.

The following is an example that explains this practice. Let us assume there is an insurance company that has an IT budget of $100mn per year. The company usually has two or three big IT outsourcing companies that are targeting big, fixed price service level deals that will be delivered from offshore. This usually involves application maintenance, BPO and long term software development activities.

Safety Insurance (SAFT) is one such company, trading at 5.6 P/E , market cap of $557mn, book value of $530mn . It solely caters to the Massachusetts insurance market .It was the second largest private passenger automobile carrier, capturing an approximate 11.2% share of the Massachusetts private passenger automobile insurance market, and the third largest commercial automobile carrier, with an 11.8% share of the Massachusetts commercial automobile insurance market in 2006, according to statistics compiled by Commonwealth Automobile Reinsurers [CAR].

Massachusetts - a highly regulated Insurance market: Private passenger automobile insurance is heavily regulated in Massachusetts. In many respects, this market in Massachusetts is unique, in comparison to other states. This is due to a number of factors, including unusual regulatory conditions, the market dominance of domestic companies, the relative absence of large national companies, and the heavy reliance on independent insurance agents as the market’s principal distribution channel.

One such company is LAN (LFL) airlines. This is the leading South American airline whose revenues have increased from $1.45bn in 2002 to $3.03bn in 2006. The operating income has increased five times from $62mn in 2002 to around $302mn in 2006. The net income has increased 8 times, from $30mn in 2002 to $241mn in 2006. The stock has risen from 70 cents in Aug-2002 to $14 (Aug-17,2007). LAN's market cap was 220mn in 2002 and is now $4.4bn. The book value in 2002 was $258mn, and as of Dec-31/2006, was $626mn. It is certainly disqualified from being a pure value investment. However, LAN's great business model roused my curiosity, and I peeked into its annual report(form 20-f).

The number of international passengers has increased from 2.58 in 2002 to 6.36 mn in 2006. However, the number of domestic passengers has slightly decreased from 2.73mn in 2002 to 2.51mn in 2006. The passenger revenues have increased from $803mn to $1.81bn from 2002 to 2006. The cargo revenues during this period have risen from $520mn to $1.07bn. One of the most striking features of this company is its low tax rate. The average tax rate in the last three years has been around a mere 15%, thanks to liberal corporate tax rates in Chile.

The focal points are the increasing wage bills for Indian employees and the appreciating rupee. Very few people take into consideration the increase in compensation costs fo US based employees , which is mainly caused by the increase in health care costs in USA. Keeping all the above factors in mind I have tried to create an equation that gives the magic year when this outsourcing cost advantage will be over.

My assumptions:

In most cases your answer will be right, but not in case of Perficient Inc. (PRFT). The stock was trading just above $1 in July-2003 and as of Aug-13,2007 it was trading at $23.00 [market cap: $675 million]. A 23 times increase in market cap. This stock may not have fit most people's investment criteria in 2003 because it was merely $30mn in market cap.

However, the interesting point to note is that the company has managed to get institutional investors' attention. This evident by the fact that it has $147mn as additional paid in capital even though its book value is around $107mn. So how has it managed to do that???

After going through my laundry list of outsourcing stocks, I found a company that is somewhat near to Graham's criteria. Convergys (CVG), which is a a seasoned outsourcing player. Its market cap as of Aug-10/2007 was $2.36bn. The stock had peaked to $27 at the beginning of the year, since then has lost 30% and is priced around $17.00 (as of Aug-10/2007).

Its book value as of Mar-31/2007 was $1.48bn, with $560 million as net tangible assets and $880mn as goodwill. The total number of employees as of Dec-31/2006 was 75,000. Out of this total, 67,500 worked in customer care, 4,000 work in Information management, 2,500 work in employee care.

Investors will be eager to see how this acquisition helps the bottom line of the company. Infocrossing's net worth as of Mar-31/2007 was $127 mn (with $157mn in goodwill) and its market cap as of Aug 7 was $400mn.

Its price has fallen from $28.00 to $22.00 in last couple of months [22% drop]. Applying the covered call strategy I found its $25.00 strike price call option for Dec-07 is selling at $3.10 [14% premium of current stock price], which is pretty good by call option standards.
The following are some other call option strike prices of similar businesses as of Aug-2/2007.

Infosys Technologies Ltd. (INFY)
CURRENT STOCK PRICE : $49.00
JAN-08 PREMIUM FOR CALL STRIKE PRICE $55 : $3.50

0. Selling paper and cherry coke -Buffett breathed business since he was a young boy. By the time he was 20 years old in 1950, he had saved $9,800 by selling newspaper and cherry coke.

Following is a table that gives a summary of its cash flow since Fiscal 2002. The last column gives the total for each component for all the years.

click to enlarge