Category: Your Money

Turning coding coolies into solution architects

It hasn’t been easy for the Indian IT outsourcing sector since the global meltdown in 2008. Even as the recession abated and markets began improving, unemployment and economic instability in US and Europe compelled governments to create more favorable conditions for domestic markets. But that’s just the tip of the problematic iceberg that’s denting IT outsourcing growth in India.

IT outsourcing has contributed significantly to the Indian economy. In the initial years, outsourcing came easy – Indian IT professionals were cheaper, work could be done faster with more people on less pay, and the Indian Rupee was not as strong. IT companies made huge profits while keeping 20-30 percent of their workforce on bench at a time. Today, the situation is quite different.

Challenges galore

The demand for IT services from US and Europe (accountable for three quarters of the work and revenue that came India’s way) has dwindled on account of their recovering economies. Furthermore, the popularity of cloud solutions has enabled more SMBs and large enterprises to manage well with a smaller workforce. Businesses no longer need bulk IT labor from India. If they have expectations, they are for experienced professionals who will add measurable value to their business.

Research firm Ovum reveals that the total contract value (TCV) of outsourcing deals in India fell by 30 percent during the last 2012 quarter. That’s a record low in 9 years.

Indian IT companies are seeing much slower growth; lesser attrition and higher productivity owing to enterprise mobility, automation and cloud implementations. Consequently, recruitment have frozen. IT freshers who were recruited on-campus in 2011 are waiting for appointment letters as their employers (like HCL Tech) try to cut costs and maintain profits. The golden dream of joining an IT company for a 6 or 7 figure annual package has just gotten tougher for college graduates.

Another challenge for Indian IT outsourcing companies is the emergence of countries like the Philippines as alternative IT/ITeS destinations.

Opportunities

NASSCOM has forecasted a reduced growth rate of 11-14 percent in IT outsourcing exports in 2013-14. However, the good news is that of the top IT outsourcing providers in India – Infosys, Wipro and Tata Consultancy Services (TCS) – only Wipro fell short of the guidance predicted for the quarter ending December 2012.

Indian outsourcers like Infosys are promoting “mini CEOs” to tap their intellectual property to the maximum rather than hiring new people. The demand for experienced personnel who can adapt to changing environments and stay productive is growing and companies are taking steps to retain such talent. As Tech Mahindra HR, Sujitha Karnad, points out – coding coolies are passé, the demand now is for solution architects. That’s where the new outsourcing opportunities lie.

IT companies are also diversifying their service offerings to stay profitable. Infosys has signed a 5 year agreement with RWE Supply and Trading (RWEST), a leading European energy trading house to provide technology services based on ‘gain-share’ – Infosys gets paid when RWEST makes a transaction on the platform.

NASSCOM predicts that the Indian IT industry will generate $225 billion by 2020 by leveraging on emerging technologies, mobile and cloud platforms, social collaboration, SMB outreach, and the integration of core business applications. It’s not an unbelievable target as India is well placed to address new opportunities and emerging markets. For all you know, this shakeup could be the re-making of Indian IT outsourcing as it matures in value as well as viability.

[stockquote]INFY[/stockquote] [stockquote]WIPRO[/stockquote] [stockquote]TCS[/stockquote] [stockquote]HCLTECH[/stockquote] [stockquote]TECHM[/stockquote]

Related articles
Categories

Analysis: JPASSOCIAT

Jaiprakash Associates [stockquote]JPASSOCIAT[/stockquote] has been the darling of stock market speculators for a while. The company can be best described as an infrastructure conglomerate that is into everything from mining to power production. The last couple of years hasn’t been kind to infrastructure companies in general and JP is no exception. Since Jan this year, the stock is down -29.44% compared to Nifty’s -4.53%

JPASSOCIAT technical chart

As you can see from the chart, the stock has long-term support at Rs. 60 levels (off which it bounced off recently) and resistance at Rs. 80 levels. Just yesterday, the stock saw a bullish 4×9 Cross-Over. RSI levels at mid-40s and an imminent MACD signal-line cross-over are supportive to a bullish outlook as well.

JPASSOCIAT - Jaiprakash Associates Limited - Quarterly Results

There isn’t much to write home about from a fundamental point of view. Most recent 4Q EPS is around 3.11 and it barely made it past the finish line in the Oct-Dec 2012 quarter. Dividends are meager and the stock is currently trading at a PE of around 22. It has a beta of 2.12 which is one of the highest that we track. Clearly, JPASSOCIAT is not for the faint of heart.

All said, JPASSOCIAT is good for a short-term trade. Buy it at Rs. 60 levels and sell it once it hits Rs. 80. For the long-term, wait for clarity in policy direction before making a bet on infra stocks.

Related articles
Categories Tags ,

Quickie: RAJESHEXPO

Rajesh Exports [stockquote]RAJESHEXPO[/stockquote], for those of you who don’t follow the stock, is a Bangalore based company that manufactures gold & diamond jewellery for export as well as distribution to the domestic wholesale jewellery market. They also own a 75 outlet retail channel via Shubh Jewellers.

I find this stock interesting because it keeps oscillating between Rs. 120 and Rs. 150 levels. As you can see in the chart below, the stock has been sitting pretty in this channel for more than a year.

Rajesh Exports Analysis

This stock could be ideal for those who are looking for some trading action without adding on a lot of risk. With a beta of 0.72, there is not a ton of volatility here. RSI indicator is in the oversold area and the stock is testing its long-time support of Rs. 120.

From a fundamental point of view, the company has shown steady growth over the last three quarters. Gold price volatility has not been kind to the firm and there could be some impact due to that.

RAJESHEXPO - Rajesh Exports Limited - Quarterly Results

As I said earlier in the post, this could a quickie trade for investors trying to get some action that, going by the recent price action of the stock, appears low risk.

Related articles
Categories Tags

Analysis: RELIANCE

Reliance Industries [stockquote]RELIANCE[/stockquote] has been a permanent disappointment since 2005 and this year has been no different. The stock is down 7.46% compared to the Nifty’s 5.35%. The stock just doesn’t seem to have the zing in spite of the bonus in 2009, the more than Rs. 8/share in dividends and stock buy-backs.

Reliance chart

After breaking its up-trend line, the chart shows that Reliance is headed towards its most recent support area at Rs. 770 levels. RSI at mid-20’s is basically plumbing the depths at this point – the stock has bounced whenever it has seen such dire readings. However, just about every other technical indicator is bearish. Its 18-day SMA cut the 9-day SMA; Aroon is bearish; MACD histograms are not helping either.

The company remains a cash machine. So much so that Mukesh Ambani is using to enter pretty much all sectors of the Indian economy. It looks like by the end of this decade, Reliance will be dabbling in everything from telecommunications to power to banking. So even though Reliance is classified as a petrochemical major, its undergoing a transformation into a wide winged conglomerate.

The stock, however, is not cheap. With a PE of 12.84, it is trading above other oil multinationals like Exxon (9.30) and Total (7.83). It has a sub-market beta of 0.86 which could have been good news except that its Bull & Bear betas are skewed towards the downside.

RELIANCE - Reliance Industries Limited - Quarterly Results

To conclude, we are a short-term BUY on RELIANCE. We expect a bounce off these over-sold conditions and a support at Rs. 770 levels. The long-term is a bit hazy. The company is at risk of losing focus by spreading itself too thin on vanity projects and blowing away its cash-hoard on capital intensive projects with low returns and intense competition.

Related articles
Categories Tags ,

Bull Beta / Bear Beta for Stock Picking

The Beta of a stock or portfolio is a number describing the correlated volatility in relation to the volatility of an index. By definition, the market itself has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the macro market. A stock with a beta of 2 has returns that change, on average, by twice the magnitude of the overall market’s returns; when the market’s return falls or rises by 3%, the stock’s return will fall or rise (respectively) by 6% on average.

The problem with a single measure of beta during all market conditions is that it might understand/overstate the risk of a stock during bull/bear phases. For example, FINPIPE [stockquote]FINPIPE[/stockquote] has a fairly benign beta of 0.68. So you would expect it to hold up pretty well during volatile markets, correct? However, with a bear beta of 1.17, it is going to tank more than the broader market and with a bull beta of just 0.007, it is not going to rise as much as the market either. So you get all of the downside without the upside. ASHOKLEY [stockquote]ASHOKLEY[/stockquote], on the other hand, has positive asymmetry with a bear beta of 0.90 and a bull beta of 1.16.

The bigger question is can this asymmetry be converted into a model for generating stock picks? Can investing in a portfolio of stocks with bull betas > 1.2 and a bear betas < 0.8 result in meaningful out-performance? We looked all the way back to Jan 2010 to pick out stocks that met this condition to see if a portfolio of these names can outperform the market. It seemed pretty legitimate at first, who wouldn’t want to own stocks that didn’t fall as much as the market when it went down but rose more than the market when it went up?

The results were a bit of a disappointment. First, the stock picks were extremely sparse. There were only 5 days during the entire period where there were more than 5 stocks that met the criteria. So there just weren’t enough data points to confirm or refute the thesis. It also didn’t help that these portfolio did not outperform the market in any meaningful way.

The Bull Beta / Bear Beta thesis needs to be further tested for different bull/bear thresholds. It is an interesting thesis and we are big fans of repeatable, verifiable and systematic portfolio strategies. Stay tuned for updates!

 

Categories Tags