72 i chronicle


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Cover Story Narayana Murthy’s Second Innings
Outlook US Dollar
Stats Major Global Currencies Recent Movement
Emerging Country South Africa
In Focus Target Gold, Again

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72 i chronicle

  1. 1. Investeurs Chronicle June 2013, Volume: 72
  2. 2. Cover Story Narayana Murthy’s return to Infosys is in accord with a global trend, witnessed in recent times, of CEOs being called back from retirement. For an organization, such choices are never easy to make. Not the least because they often imply a tacit admission by it to the existence of the state of affairs inside, whose full import has never been quite captured in analysts’ reports or price signals coming out of the market, till then. Also, the need for a paradigm shift away from the current management structure is forced on a company when it is situated at an inflexion point in its own history or that of the industry/economy as a whole, to which it belongs. For the returning CEO too, it is not an easy decision as success in one’s second innings is neither guaranteed nor inevitable. If he then risks his hard earned reputation for success in the past, for the promise of an encore of applause, it must only mean that he cares for the organization, that he so successfully managed in an earlier era, deeply enough as to not bear seeing it fail before his very eyes. The board of Infosys, in its wisdom, called Naryana Murthy back to get the company going again. He'll be assisted by son Rohan.Everything that could have gone wrong has gone wrong. Sales are down, profits are down, employee morale is low, the strategy is confused, and the famed PSPD model - predictability of revenues, sustainability of revenues, profitability of revenues and de-risking of business - is a matter of the past. The company looks divided and the decline has been sudden - in six to eight quarters after a glorious 17 years. It is not that there is gloom and doom in the market; three other competitors have done well. The crisis is clearly one of leadership, shocking the board adequately to call the 67-year-old founder back from retirement to complete the unfinished agenda. Infosys has been under-performing in the information technology industry over the last couple of years and if its guidance for the current fiscal is to be believed, it will grow at just about half the pace of that of the entire industry. This is indeed a lamentable position for a company that was once the acknowledged bellwether for the IT sector; an industry leader not just in business but also in corporate governance. Mr. Narayana Murthy’s second innings at Infosys will likely be a lot more challenging, particularly since (a) he has been away from the executive responsibilities of the company for the last seven years and (b) the company’s problems are structural rather than mere quarterly stumbles. His leadership would likely improve execution at Infosys. But this could take 6-9 months to be reflected in financials.Mr. Murthy’s return will boost employee morale and investor sentiment in the short term. Narayana Murthy’s Second Innings
  3. 3. Cover Story Here are the issues, which Narayana Murthy would face in his second innings: Communication: Infosys stock has exhibited high volatility around earnings with the shares moving more than 5% on six out of past 10 quarterly results. In the past two result seasons, the stock has moved about 20% on the result day. This indicates ineffective communication on result expectations. Furthermore, the company suspended quarterly guidance in October 2012 and full year earnings guidance from April 2013. We agree that weak performance could be one reason behind higher volatility; however, we also note that despite weak performance, peers like Wipro have exhibited lower stock volatility and a more stable guidance philosophy. CEO: The next management change (due by March 2015) would be the first transition to a “non founder” CEO for the company. Given the disruption around the last CEO change, we believe it is vital for Infosys to come out with a definite succession plan significantly before the event to manage internal transition and allay investor concerns.S.D.Shibulal’s (CEO)term ends in 2015 and the company should ensure a smooth succession. Cash: Low dividend payout (and a reducing payout ratio over the past two years) along with a cautious acquisition strategy have led to a cash pile of $4 billion with the company. While historical conservatism around cash usage could be explained by smaller size and rapid growth, we believe that the management needs to significantly improve its lazy capital structure to increase shareholder value. Costs: Infosys employee costs have increased by +270bps in the past five years compared with -650bps for TCS. While weaker revenue growth could be one reason, we note that Accenture has been able to protect its margins despite slower revenues growth on account of stricter focus on costs. All this change needs a charismatic, inspirational leader and there can be no better one than Murthy. Infosys is not an ordinary company. It is the poster child of India's liberalization; the dream company of India's educated middle class; the role model; the company that led and set standards in business performance, governance, employee policies, strategy, value creation for all stakeholders, enhancing investor protection and keeping the faith of overseas investors for so long. It symbolized the new India, based on merit, openness, transparency and trust, qualities severely lacking in our public life today. Of course, its own performance and standards set such a high bar that many just gave up trying to follow this model, and it became a victim of its own success. But the resurrection of the company gives new hope that the story will continue. If Murthy can turn it around, make the new leadership perform and then go into the sunset within three years along with his son Rohan, his legacy would keep us proud for many years to come.
  4. 4. EUR/USD - The EUR/USD strengthened during the latter part of May, moving from a low of around 1.2800 to above 1.300 by May 30th. Economic morale improved in the 17-state union. Southern Europe saw some of the strongest improvements in the region. In the meantime, the U.S. recovery appears to be picking up, atleast the recent data on number of jobs added suggests so. U.S. economy has added 175,000 jobs last month, slightly more than the 170,000 gain forecast by economists.Hence, looking into June 2013, currency pairis expected to remain within recent trading bands. USD/JPY -The dollar recovered from two-month lows against the yen on 7th June 2013 after stronger-than-expected U.S. jobs data for May renewed expectations that the Federal Reserve may scale back its asset purchase program. USD/JPY pulled back from 95.00, to settle at 97.54. Driven by anticipated easing from the Bank of Japan, forex traders have sold the Japanese yen to remarkable lows. But, these trends may be ready to reverse, judging by a reversal in confidence seen in the country’s equity markets. Exporters also want the currency stabilized in order to contain their costs and make their businesses more predictable to investors. Looking into June 2013,the Japanese yen is expected to stabilize at around 100.00 or perhaps strengthen a bit against the U.S. Dollar with some profit taking. INR/USD-After the Government of India announced a broader set of policy measures in early September which coincided with the announcement of QE3 in the US, the rupee appreciated nearly 7.8% in a month. Since then the Rupee is under pressure, owing to lumpiness of the foreign debt repayment schedule, or increasing demand for dollars by the importers. However, the fundamental problem is of twin deficit and weaning FII. The rupee will also face additional headwind since sustained improvement in the US economy will lead to the Fed unfolding its QE exit strategy in the near future,.The Indian rupee may depreciate 10% versus the US dollar by December and would touch 60 in short term. Stats Outlook-US Dollar Gloss Inflation Index Bonds Also known as inflation-linked bonds or colloquially as linkers, these bonds are those where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an investment. Inflation-indexed bonds pay a periodic coupon that is equal to the product of the inflation index and the nominal coupon rate.
  5. 5. Emerging Country- South Africa South Africa, officially the Republic of South Africa, is a country located at the southern tip of Africa. South Africa is the 25th largest country in the world by area and the 24th most populous country with over 51 million people. South Africa is ranked as an upper-middle income economy by the World Bank. It has the largest economy in Africa and the 28th-largest in the world. The country is rich in natural resources and is a leading producer of platinum, gold, chromium and iron. South Africa is a popular tourist destination, and a substantial amount of revenue comes from tourism. South Africa’s export based economy is the largest and most developed in Africa, but with more unemployment and less GDP rate than some African countries. Unlike most of the world's poor countries, South Africa does not have a thriving informal economy; according to OECD estimates, only 15% of South African jobs are in the informal sector, compared with around half in Brazil and nearly three-quarters in Indonesia. This is due to country’s widespread welfare system. Historically, from 1993 until 2013, South Africa GDP Growth Rate averaged 3.19%. From 2002 to 2008, South Africa grew at an average of 4.5% year-on-year, its fastest expansion since the establishment of democracy in 1994. However, in recent years, successive governments have failed to address structural problems such as the widening gap between rich and poor, low-skilled labor force, high unemployment rate, deteriorating infrastructure, high corruption and crime rates. As a result, since the recession in 2008, South Africa growth has been sluggish and below African average. Figures released on May 28th 2013 showed that GDP in South Africa rose at an annualized rate of just 0.9% in the first quarter of CY 2013. One of the few bright spots in the first-quarter GDP figures was mining, but its output is falling again and the threat of strikes clouds its immediate prospects. Around a quarter of South Africa’s total exports are to Europe, which is mired in recession. Spending at home is also weak. Joblessness is a particular problem for the young. The unemployment rate for those under 25 is 53%. The inflation rate was unchanged at 5.9 percent for a third month in April 2013. The bank forecasts inflation to peak at an average of 6.1 percent in the third quarter, breaching the bank’s 3 percent to 6 percent target band. South Africa relies mainly on foreign investment in stocks and bonds to help finance the current-account gap, inflows that have fluctuated this year as investor sentiment deteriorated. A new report from the African Development Bank (ADB) and the OECD ranks South Africa a lowly 48th out of 52 countries in terms of its economic outlook. The sustained 5% rate that the government says is needed to cut unemployment and poverty seems a world away. The bilateral relations between India and South Africa have grown strong since the end of apartheid in South Africa in 1994. Ties with further solidified with South Africa's 2011 acceptance into the BRICS group. Bilateral trade between South Africa and India increased by 135% between 2007/8 and 2011/12. South Africa currently ranks number two in the list of African exporters to India. South Africa's main exports to India are gold, coal, diamonds and platinum, while the its imports from India include auto components and steel. India and South African nations are expected to conclude a preferential trade agreement by the end of this year, which aims at reducing tariffs on certain items traded between the two sides. It would boost bilateral trade to USD 15 billion by 2014. South African economy is expected to grow at 2.4% in 2013. However, South Africa’s increasing external imbalances, and potentially resurging labor tensions could affect its macroeconomic policy framework beyond its current expectations. South African economy is expected to grow at 2.4% in 2013. However, South Africa’s increasing external imbalances, and potentially resurging labor tensions could affect its macroeconomic policy framework beyond its current expectations. Vital Economic Statistics of South Africa Economy Particulars Details GDP (nominal) $402.15 bn (2013 estimates) GDP growth rate 2.4% (2013 estimates) Currency Rand Credit Rating BBB (S&P) Baa1 (Moody’s) Fiscal Deficit 5.2% of GDP (2012) Current account deficit 6.3% (2012)
  6. 6. In FocusForex Target Gold, Again When international gold prices declined sharply over the past several weeks, it was believed that lower prices would dampen the enthusiasm of buyers who were lured by the prospect of endless appreciation. But, unfortunately, this didn't happen; as people presumably felt that this was a temporary decline and it was a good time to build up holdings. As a result, the total value of imports shot up. An extremely worried policy establishment has responded with several measures, essentially imposing quantitative restrictions on imports. These come on the back of a series of increases in import duties on gold, taking them from 0 to 6 per cent over the past year - and further up to 8 per cent on 5th June 2013.Unfortunately, government has again failed to nail the problem. India's long experience with quantitative restrictions on imports suggests that parallel channels will rapidly emerge. Jewellers and bullion traders say that nearly 200-250 tonne of gold may be smuggled into India this year .As more demand is satisfied through these channels, the visible current account deficit may narrow, but the true picture will be revealed by the hawala rate on foreign currencies, which will now begin to deviate from the rate in the organized market. The problem needs a threefold solution-First, increase access and real returns on basic bank deposits.. Second, promote the development and offering of gold-linked financial products, which will not require physical ownership and, consequently, imports. Third, as also proposed by the working group, the very large stock of gold already in the hands of Indian households - estimated at 20,000 tonnes (annual imports are around 1,000 tonnes) - should be brought into the market by encouraging these households to convert them into financial products. Gold Imports have actually increased by leaps & bounds as proven by WGC data from the last 10 months. To add to the woes, Gold smuggling has become lucrative. It seems that all the steps taken by India to curb Gold investment demand have only boomeranged and made Gold costlier. The government is taking wrong steps in the right direction. Sensex Nifty 20,030 .77 19,429 .23 6,083. 15 5,881. 00 Gold (10 gm) Silver (1 Kg) 26417 27526 43590 43193 Crude Oil ($/barrel) Dollar/INR 109.40 109.40 55.57 2 57.90 6
  7. 7. About Investeurs Consulting Private Limited For a good business, finance is as crucial as vision, management and product. Intuitively then Business Finance plays a vital role in the business prosperity. We, at Investeurs Consulting Pvt. Ltd understand and appreciate the vitality of this discipline and the responsibility that comes with it. As Business Finance Consultants we realize that finance is an enabler that contributes significantly towards realizing your business goals. We bring to the table 18 years of vast and vivid exposure to different businesses, a profound understanding of business and financial dynamics and excellent relationship with banks/ financial institutions. Domestic Trade Finance: Negotiation of Inland Letter of Credit International Trade Finance: Buyers’ Credit and Suppliers’ Credit Capital Investment: Project Funding and Term Loan Working Capital Management Factoring Private Equity Rating Assistance TeamChronicle Akanksha Srivastava akanksha@investeurs.com Nidhi Gogia nidhi@investeurs.com Shagun Khivsara shagun@investeurs.com Harpreet Kaur harpreet@investeurs.com Disclaimer: InvesteursChronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided. Investeurs Consulting Pvt. Limited S-26, 27, 28, 3rdFloor,Veera Tower, Green Park Ext. New Delhi-110016, www.investeurs.com