Deepak Shenoy

Bangalore Blasts Threaten Indian Outsourcing

Aw c'mon now - don't panic on hearing some bits and pieces. None of this stuff was even CLOSE to the IT corridor in Bangalore and even where the "bombs" were placed, there wasn't too much traffic . What was used was gelatin sticks - commonly used by quarrying miners, some of whom don't like the new government that's in a few months ago. None of the blasts were big enough to even cause more than a small dent in a car - the only unfortunate victim was hit by external shrapnel.

Not to say that this isn't an act of terror - oh it was fully intended to terrorise - and we will prevail over the perpetrators. But it's ridiculous that people all over the world get taken for a ride, including our own silly media.

After 9/11 did individual companies beef up their security? Not really. America as a nation did. And this time India as a nation will be up to the task - so that every little company doesn't have to go nuts. Yes continuity is an issue and as far as I know terrorism is the last on the list of potential issues for continuity, most common of them being submarine cable breaks, power outages and time zone turnarounds.

I may not subscribe to the great outsourcing story India has, but to say that companies must be worried now, after this incident, is way over the line. By saying so you are simply giving in to terrorism. India has prevailed and it will, again.

Sorry but there are times to be worried about terrorism. This is not one of them.

Seeking Alpha in Indian Real Estate

Prices are already going down in India (though urban real estate and condos are hugely valued and people tend to pay huge premiums as compared to the US, even in a slump). Specifically, in Bangalore panic pricing is setting in. Even in Delhi and Mumbai prices have slowed down and there aren't too many transactions happening - both in commercial and residential real estate.

I'm in India and I can short them all - but I just don't think it's right to do it now. The national budget, usually a big important thing here, is up on the 29th and could contain sops for the sagging real estate sector, or for real estate investments in general. 29h is also the first day after the current month's futures expiry so if I had to short, I'd choose the end-of-day of the 29th to start.

How Much Longer Will Indian Outsourcers Offer Cost Advantages?

I'm in Bangalore where the "maximum" for 10 years of experience (equivalent to the 120,000 a year salary in say Northern California) is about 20-25 lakhs. (2-2.5million rupees) Your mileage may vary of course.

Also it's not just about quality. The time differences is a huge issue in my opinion. Secondly communication skills vary, and the best communicators (in India) demand and get far higher salaries. Thirdly, process management is great for the lower cost jobs, but innovation is more important for moving up the value chain. We have not yet demonstrated our prowess in that field, at least not in the outsourceable dimension, if there is such a thing.

I don't think you can outsource innovation unless you can outsource ownership as well. Innovation comes from the ability to benefit from the ends, not the means.

IMHO, what will happen is that eventually there will be balance sheet transfers. Meaning a division of a big company gets transferred over to Mr. Wipro or Mr. Infosys. This then generates future cash flow, and then the Indian company can choose to have American Employees, or Indian employees or use people in Mexico, Argentina or Philipines - makes no difference.

Now they're competing with HP, IBM and the like, which are a) more experienced in deal making, b) also have offices in India and other lower cost countries and c) have far bigger balance sheets and deal absorbing leverage.

From a stock perspective this means a hit to P&L upfront, dilutions or fund raising if necessary etc. If they go down this route (they have to, in my opinion) we will have to see how they pan out, since they haven't done this in any significant way earlier.

Another thing is to spend money on a product framework that could be cross-sold among customers. It needn't be a software product - those can't be cross-sold effectively - but could be things like TPA services or wholesale agency networks for insurers, deal syndication for banking (buy prosper.com!) and so on.

This is now an acquisition based process rather than the plain old gimme work and I'll do it. It's more like "We know your process well enough to take it over,manage it, give it to you for cheaper than you pay right now, and even use it to cross sell to others". Different ball game, different rules. We'll see how it pans out.

Which IT Outsourcing Company Gives Maximum Return on Covered Calls?

Actually, you would write an OTM (out of the money) naked put - not an in the money one. $55 put is already in the money to the tune of $4, and the real price of it should be around $9 ($6.5 looks suspiciously low)

For the covered call, you chose a $55 call, getting $3.5 on it. THat means at a spot (cash) price of $50.5, you are effectively getting the share for $47, which is your break even point on the downside. To get the same thing you should write a $50 put for $4 (meaning a BEP of $46) or a $47.5 put at $2.85, which is an (even lower) break even point of $45 or so. THe former is preferable if you are bullish since you get more commissions (which is the income) and the latter is a play-it-safe strategy. Essentially the put should be out of the money and the break even point should be around the same level as the covered call you would otherwise have written.

Coming to brokers that give this option: I am in India where all brokers allow you to write naked puts on Indian stocks or futures, margin requirements vary from 50% to 10% of (strikeprice x lot size). In the US many brokerages do not allow naked put selling - or if they do they ask you to put up 100% of (strikeprice x lot size). the 100% margin is lousy because then it increases your capital exposure needlessly; obviously you will plan to get out of the trade if it goes against you (same as with a covered call). Still it lets you pay brokerage only one way (for the option) which is cheaper than the covered call (buy trade plus the option). But there might be a few that allow a naked put option for a decent margin - you may have to check...

Which IT Outsourcing Company Gives Maximum Return on Covered Calls?

Perhaps you misunderstood - i talk about WRITING naked puts, not buying them.

Writing a Naked Put is exactly the same on the risk/return graph as a covered call, if you intend to square off at expiry. It's just that a covered call involves more commissions to the brokers, which is why it has always been promoted. If you plot the pay off diagram a naked put it's exactly the same as a covered call (premium as profit if the stock goes up, strike price minus premium is your break even.

When you write covered calls or naked puts, you should write them on stocks that you do not expect to move much. There are perhaps better stocks than Infy (and indeed the Indian IT pack) to use this strategy.

For the same $20,000 use $15,000 as margin and write a naked put instead. As I said, the payoff is exactly the same as a covered call, and you pay lower commissions. Even if you use the same amount at risk, writing a put is less time consuming since you need to track only one thing (the market price of the put).

Which IT Outsourcing Company Gives Maximum Return on Covered Calls?

Why not simply write a naked put on Infy, Jan 08, strike price 47.5 - you get $3 per share in premium = $300, and your break even is $45. If the stock moves up you can square off (price will be lower) and write a higher put, say $50. It requires far lower investment (just the margin, which is obviously lower than 100 shares x market price) and the pay off diagram is EXACTLY the same as a covered call. Same risk, lower investment, same $ returns = higher return percentages.

Infosys: The Relationship Between Net Income, Market Cap and Employees

Correction: In the above post I've used 5.08 lakhs as profit per employee in the text. Please substitute that by 5.34 lakhs as mentioned in the table at the top of my comment.

Infosys: The Relationship Between Net Income, Market Cap and Employees

Consider 06-07 figures: (Rs. cr.)
Revenue: 13,893
Net Profit: 3,856
Market Cap: 113,860
Employees: 72,241

Profit per employee:
2007: 5.34 lakhs
2006: 4.66 lakhs
2005: 5.02 lakhs
2004: 4.81 lakhs
2003: 6.02 lakhs
2002: 7.52 lakhs

in 2006-07 they've spent about 7000 cr. on employees (salary + provident fund). That's about 9.72 lakhs per employee. Meaning all other things being equal, they make a post-expense-pre-salar... amount of 15 lakh (1.5 million) rupees per employee.

If salaries go up 10-15%, they will pay out 11 lakhs per employee. If the dollar's dropped 10% and it affects their revenues about 7%, they will make 14 lakhs per employee - a profit of about 3 lakhs per employee. Down from 5.08 lakhs last year.

To make the same amount of profit (3856 cr) they need to have 128,500 employees, an increase of 55,000. Their gross hiring target is 25,000. (That's gross, not counting attrition)

You may have to discount the above with higher utilization that they will try, increasing billing per hour, reducing other costs (about 25% of their cost are non-salary) and increasing headcount in China or other places. I can't estimate the impact of that, but my feeling is that this impacts net by about 15% - meaning they might squeeze out profits of 3.5-4 lakhs per employee. Still, that's a considerably lower number than current (5.08 L)

I have no holding or interest in INFY.

Infosys' Challenge: To Understand the Changing Dynamics of Outsourcing

Actually their rupee guidance is highly muted compared to the dollar guidance. The Rupee guidance plots growth at 20-22% for the year (dollar growth is 27%). They've factored about Rs. 43.1 to the dollar though, and the current price is 42.1; they are not heavily hedged either. I don't think the rupee guidance is all that great either, given all this. But they are known to beat guidances substantially - they gave a 26% guidance for last year, and they were up 52% (in rupees).

On the Indian exchanges the forward PE considering a 30% growth is around 23. Not too bad, honestly.

But some of the other stuff you've mentioned are noteworthy. The Mexican facility may not be just a worker hedge - it's also a way to avoid the time zone issue most outsourcing gets stuck with. 300 workers will probably expand to 3000 in three years, hardly a significant percentage of their headcount. Yes eventually some of this will be a commodity business - but they have a $1 billion warchest for acquisitions, maybe some of that will change the equation. They're smart cookies, the managing lot.

The Surprising Shortage Of Quality Global Labor

Its worse at the ground level here in India. I personally hire less than 1 in 100 candidates that pass our resume filters, phone interviews and personal interviews. One reason I routinely reject candidate resumes is simply because they've reapplied for a job within a year of their current position, sometimes as low as three months...and usually when asked why, I get "am looking for better opportunities". And here's what - they still expect a 30% increase in salary.

Phone interviews have been alarmingly bad - Resumes seem to have been written by someone else because the quality of language and understanding as seen on the phone seems to have little correlation with what's on the document. Note: This is a generalisation, just what I've seen.

People actually expect you to say "you're hired" on the phone. Of the few that come over for a face to face interview, most get extremely defensive when asked serious technical questions. Others don't even want to write code for a programming job, or such.

It is really difficult to find someone who's really good and has the right attitude. And that's prompted me to want to have a non-people intensive business - and therefore, out of the outsourcing industry. Oh yes, the Indian market has more than a few such opportunities.

Visa Cap Issues Offer Excuse for Indian Outsourcing Stocks To Pull Back

Also you may want to consider this:
economictimes.indiatim...

The Rupee has hit an 8 year high and this is not good news for companies that earn in dollars and spend in rupees.

INFY results are out on April 12. If they retain sequential earnings growth at 7%, they will have a last Q EPS of 18.19. Which gives them a 4Q earning of Rs. 65.49, for which the current INR price (Rs. 1990) gives us a P/E of 30. Their last years EPS (Apr-05 to Mar06) was 43, so this is approximately 50% growth.

The guidance, though, is of prime importance. They're likely to issue a 25-26% growth guidance for the next year. They generally beat guidance by 300 to 400 basis points, so at this rate, the company seems fully valued. If the dollar continues to slide, their currency hedges (which are typically 3 to 6 months) will drop out and they'll probably lose about 5% on revenue.

Companies like Infosys needn't use the H1-B quota. They can use something called the L-1 - an intracompany transfer visa which has no cap. The only thing is that the person needs to be working with Infy in India for over one year; though for a company like INFY it's not a big deal. The H1-B cap will only affect them sending people they've just hired over to the US for a work stint.