Dayanand Menashi

Which IT Outsourcing Stock is the Best?

Madhusudan,
I agree with your point that the core competance of offshoring gained by the Indian IT outsourcing heavy weigths cannot be mimmiced by the MNCs in few years. They would take years before they can achieve expertise in outsourcing field.

Coming back to your point on which stock is best for investment, it should be kept in mind that not all good companies are good stocks to invest. The golden rule of investing is to figure out "IS THE STOCK UNDERVALUED COMPARED TO ITS INTRINSIC VALUE".

In order to explain my point: Just consider the case of Microsoft. It is one of the best companies in the world. Their growth has been phenomenal in recent years (24% growth compounded annually).Following is their growth of net income last five years.

2002 $5.3bn
2003 $7.5bn
2004 $8.1bn
2005 $12.2bn
2006 $12.5bn

Now looking at the stock price, it was $30 in may-2002 and was around the same price in May-2007. The reason being the stock has been overvalued last few years and the market has been contantly correcting its value by reducing its P/E. Which during the dotcom bust was around 84 and has come down to around 20 now.

Following are the P/Es of some of the leading outsourcing companies.

Infy P/E = 28.5
Wipro P/E = 27.4
Cognizant P/E = 36.3

IBM P/E = 17.9
ACN P/E = 19.5
EDS P/E = 18.2

I guess your analysis should be more on evaluating the P/E of the above mentioned stocks and figuring out if they would remain the same in near future.

visit me @ annualreportanalysis.b...

How Much Longer Will Indian Outsourcers Offer Cost Advantages?

Sankar,
If you see my equation, it boils down to the fact that the USD will change from Rs 40 to Rs 23 in 10 years.This is based on the fact that USD was Rs 16 in 1990 and Rs 40 by 1998. So actually I am still conservative in my approach.

I considered 10 years experienced professional just as a benchmark.The 3-5 exp folks comparison will also be in a similar line.

D

How Much Longer Will Indian Outsourcers Offer Cost Advantages?

Deepak,
The gist of your reply what I understand is "VALUE ADDITION". I agree with you on that point.It is the oldest business rule that has never changed nor will ever change.In essence, till you bring value addition to your customers they will keep on coming to you.The day you stop it they will go somewhere else.

Till date the Indian consulting companies were bringing the value addition of "LOWER COSTS".But companies like Accenture, previously known as Andersen consulting were established in fifties and developed there expertise in helping the customers in improving their business processes.In fact in those days a consultant was purely hired for those reasons.

<b>FIRST PROJECT BY ARTHUR ANDERSEN :</b> Accenture originated as the consulting division of Arthur Andersen which was founded in 1913 by Arthur Andersen and Clarence DeLany as Andersen, DeLany &amp; Co. Its origin goes back to 1953, when General Electric (GE) asked Arthur Andersen to undertake a feasibility study about payroll processing and manufacturing automation using computers for GE's Appliance Park manufacturing facility near Louisville, Kentucky. Arthur Andersen recommended installation of a UNIVAC I computer and printer, and GE agreed, which is the start of what became the first-ever commercial computer in the United States. Joe Glickauf was Arthur Andersen's project leader for the GE engagement and was responsible for the payroll processing automation, launching the era of data processing. Considered to be the father of computer consulting, Glickauf headed the Arthur Andersen administrative services division for 12 years.

Accenture since its first project fifty years back has mastered the art of improving business processes of its customers , the most important thing to note is that it has taken them decades to master this.The challenge for Indian IT consulting companies is to mirror this achievement in years instead of decades.

<b>WHEN CAN WE SAY INDIAN IT CONSULTING COMPANIES HAVE ACHIEVED THIS THRESHOLD? :</b> The day revenue per employee for Infy or Wipro is same as that of Accenture or HP. We all know its a long way to go....

Wipro's Infocrossing Acquisition Could Herald A New Age of Buyouts

Yes Microsoft could buy Patni and use its resources for software development provided it suits there acquisition criteria. Microsoft bought hotmail for 400mn in 1996.As such hotmail was a free e-mail service providing very little revenue. But when it was combined with MSN it became a great asset with huge potential of getting advertising revenues.

Coming back to your point on Patni being acquired by Microsoft. Patni's resources are specializing in several technologiies: mainframe, web, SAP, microsoft to name a few....this means more than half of the resources wont be much of use for Microsoft's product development.........a cobol programmer with 10 years experience will be of little value to microsoft, and 30% of Patni's resources are COBOl experts (based on my personal experience of working in that company for 7 years).

Let us say there is an outsourcing company in India that is specializing in microsoft technologies and has about 1,000 employees and is selling at $x. If it costs Microsoft India more than $x to add 1,000 employees then obviously they would jump on that Indian outsourcing company because Microsoft will get its additional employees at a cheaper price......as of now I dont see any such company in India.

Wipro's Infocrossing Acquisition Could Herald A New Age of Buyouts

It is not necessary for an intelligent answer to contain world's all financial jargons . With my experience of interaction with an averrage investor , I guess he or she is looking for business analysis he or she understands which is PLAIN ENGLISH.

Wipro's Infocrossing Acquisition Could Herald A New Age of Buyouts

Coming out of the intricacies of finacial accounting on calculations of cash flow, lets talk PLAIN ENGLISH. As the whole deal was on cash so any shareholder will be curious to know as to what will be the time frame Wipro expects before it gets back its $400mn.As we are discussing IT outsourcing business so I guess it is not unusual to anticipate 20% ROI, because that is quite conservative compared to the growth rate of industry.

In this high growth IT outsourcing indutry if Wipro says that they will invest $400mn and wait for 10 years to get their money back (assuming your single digit ROI). The shareholders will get a heart attack.

The very reason people are investing in IT outsourcing business is because of its high growth rate.If they were to expect single digit growth rate then they might go to some less risk financial companies like Citigroup.

BASIS FOR WIPRO'S INVESTMENT : The whole world knows that Infocrossing will nobe generating $400mn in cash flow next 5 years, and that is not Wipro estimates. The reason they are taking over this infrastructure management company is to use Infocrossing's standing in the market to help its core business of application outsourcing.

Explaining this in plain english, let us say there is a IT staffing company in India that had 10 programmers who were working for Indian clients and earning about $1,000 evey month. If an American software company buys that Indian staffing company for $100,000 then they dont expect the programmers to generate a cash flow of $100,000 by working for Indian clients. What they would instead do is are-deploy those resources to develop their latest product . If they are able to develop the product in two years and sell the software product to its clients earning a net profit of $100,000 then they have recouped their investment in 5 years. Plus they have created two assets :
1. the software product that will have earning power for years to come.
2. Experienced programmers who are well versed with their product development.

STRATEGY OF REDEPLOYING THE ASSETS : This is the strategy Wipro is going to undertake once it acquires the company, it is going to re-deploy the assets in line with its business model.

Which IT Outsourcing Company Gives Maximum Return on Covered Calls?

I guess I am getting your point......let me give an example and make sure if this is what you meant.

1. Looking at the put prices for INFY today for Jan-08 strike price of $55, it is $6.50
finance.yahoo.com/q/op...;m=2008-01

2. If I write naked put for 300 shares then I get $1,950 directly.

3. Before Jan-18,2008 I should be ready to buy 300 shares for $55.00 .

MAXIMUM PROFIT : $1,950 by zero investment (ignoring commission costs). This would happen if the share price of INFY remains above $55 for most of the time.

MAXIMUM LOSS : Theorotically I can loose ($16,500 - $1,950) = $14,450. This is if INFY would got to ZERO....:). Which I am pretty sure would not happen.

So practically I might loose some money if INFY let us say goes down to $45.00 by Jan-2008, but there would be a chance to recoup that money if INFY goes up to $48.50 ($55 - $6.5)

Sounds interesting PAL.....do you know if any online broker gives this option.I use Sharebuilder and I dont think they give this option....

Indian Outsourcing Stocks: Beware The Stronger Rupee

Thomas,
Being in IT consulting industry I can exactly understand your point. You know what is the biggest USP of ACN stock......it is that even though they are the world's biggest outsourcing company, outsourcing is less than 50% of its total revenue.Becausue its consulting revenues is more than that of outsourcing.

2006 figures
Consulting revenues - $9.89 bn
outsourcing revenues -$6.75bn

So for any investor that wants to invest in outsourcing business and also want to play safe....there is just one stock.....u know what I am talking about...

Which IT Outsourcing Company Gives Maximum Return on Covered Calls?

Covered calls are usually written when the amount of risk you want take is limited. For naked put or call there is a great amount of chance you can loose all your money.

SCENARIO : If my investment budget is $20,000 then this is what I would do:

1. Put $15,000 in a stock (and write a covered call) that :
i)I know the most about
ii)Its fundamentals are strong and its income is growing at least 20% per year.
iii)Its market cap is at least $5bn

2. $3,000 in a large cap company that pays good dividend.

3. $1,000 in some small cap stock where I am prepared to loose about 50%.

4.Put the rest $1,000 in a naked put or call where I am ready to loose all

Indian Outsourcing Stocks: Beware The Stronger Rupee

Hi Eric,
Good point on strengthening of rupee. I feel even Cognizant will be equally impacted with this because even it has most of their employees in India who are paid in Indian rupees.

And as well all know Cognizant's maximum revenue comes in Dollars. So as rupee strengthens their revenue remains the same but the costs increase, becuase they have to spend more dollars to convest to rupees to pay their employees.

Following is a simple example :

Let us say Cognizant has a project where they are expecting $1mn revenues each quarter. 40 people are working in India in this project.Avg pay for an employee in this project is Rs25,000 / month which is Rs 75,000 / quarter.

Therefore net pay for 40 people = Rs3mn / quarter.

If for first quarter 1USD = Rs 45.00 then the employee cost for that project for that quarter = $66,666 (Rs 3 mn / 45)

If in the second quarter 1USD = Rs40.00 then the employee cost for the project that quarter = $75,000

This is an increase in $8,344 which is a whopping 12% increase.

CONCLUSION : The impact of gain in rupee is not dependent as to where the company is headquarterd instead it depends on its headcount in India. In fact I dont see how Accenture wont be impacted because it is projecting to have around 50,000 people in India by the end of this year.

Thanks,
Dayanand
visit me @ annualreportanalysis.b...

Which IT Outsourcing Company Gives Maximum Return on Covered Calls?

As the difference was just $0.50 so I ignored that and took the next higher price that was $30.00 . The reason I did is because I dont think it is practical to write a covered call on a stock trading at $24.50 for a strike price of $25.00. Unless and until you are just happy with the premoim you get on writing the covered call.

Which IT Outsourcing Company Gives Maximum Return on Covered Calls?

Hi Ciba,
Please read the title of my blog again "Which IT Outsourcing Company Gives Maximum Return on Covered Calls?"


Also I have mentioned "For calculating maximum return, I have considered the next higher call price than that of the stock price. For example, the next higher call price for INFY, whose stock is around $50.50, is $55."

This is the reason I had to choose the $30.00 strike price for Satyam and I have been consistent with that rule for all other stocks.

I would appreciate if you be professional in your comments.
Thanks,
Dan.

Increasing Taxes Should Keep India’s IT Biggies at Bay (INFY, WIT)

Hi Ciba,
Please Dont take any of my remarks personally.... infact I have enjoyed chatting with you here in seeking alpha, I did learn a lot. I guess these kind of positive debate keeps this site alive.

Thanks,
D

Increasing Taxes Should Keep India’s IT Biggies at Bay (INFY, WIT)

Hi Ciba,
I thought you believed in FACTS and go through the SEC filings for your analysis, so cant believe you are asking such a basic question.

FYI all Indian IT companies are enjoying a tax holiday from govt of India . This holiday is about to expire in 2009.

Following is an excerpt from Infy's latest 20-f report. in the section "Risks related to Investments in Indian companies and international operations generally"

Currently, the Government of India provides tax benefits to companies that export software from specially designated software technology parks in India. These tax benefits include a 10-year tax holiday from Indian corporate income taxes. We benefit from the 10-year tax holiday on Indian corporate income taxes for the operation of most of our Indian facilities, and as a result, our operations have been subject to relatively low tax liabilities. These tax incentives resulted in a decrease in our income tax expense of $224 million, $160 million and $126 million for fiscal 2007, fiscal 2006 and fiscal 2005 compared to the effective tax rates that we estimate would have applied if these incentives had not been available.

The Finance Act, 2000 phases out the 10-year tax holiday available to companies that export software from specially designated software technology parks in India, such that it is available only until the earlier of fiscal year 2009 or 10 years after the commencement of a company's undertaking.