How Yogi Deveshwar Changed ITC

ITC chairman Y C Deveshwar, better known by his nickname Yogi, is a man who loves doing deals. It was no surprise, therefore, that he went out of his way to settle the 20-year-old tax dispute with the excise department of the central government earlier this week in pursuit of his stated intention to clean up the books of ITC and settle outstanding disputes and litigation.

Deveshwar inherited a slew of disputes from his predecessors when he assumed the mantle at ITC -- they ranged from unpaid tax notices through criminal cases filed by the government of Singapore and trade-related litigation in the US.

"Many would have described the inheritance as a crown of thorns but Deveshwar's commitment to the company has never wavered," say his compatriots in Kolkata.

Deveshwar has braved criticism over the years at successive annual general meetings, from shareholders who would have liked ITC to dip into its vast reserves and issue bonus shares or other forms of shareholder reward.

The chairman's position has been that the firm would be wise to conserve its resources till such time as the disputes could be resolved through a carrot and stick policy, of legal action and judicious pay-outs.

He has conveyed this message to agitated shareholders over the years through replies that were strong on both logic and charm, and disarmed them. To be fair, not all his deals have worked -- an offer to settle such a dispute in Singapore was not accepted by the administrators there.

So why did it work in India? It's because ITC is today seen as a true-blue Indian company (and Deveshwar can take credit for this too!) that has been investing in the rural economy and in crucial sectors of the economy much before such things became fashionable.

The company's investments in the creation of a unique information-technology-enabled rural information and trading network, called e-choupal, and India's first rural mall at Sehore, have transformed ITC from a multinational peddling cigarettes to a venture with firm roots and commitment in the Indian economy.

Its paper business has looked beyond the balance sheet through investments in social forestry programmes and environment-friendly technology. Its retailing and foods businesses have brought Indian products to the market without a hitch, and its hotels have Indian-ness at their heart.

As far as the tax dispute is concerned, some credit doubtlessly goes to the government for being so pragmatic as to gracefully accept the verdict of the apex court and withdrawing the ill-advised Ordinance that sought to recover unjust dues through executive action.

But just as much credit should go to Deveshwar's skill in cooling down what could have been a nasty run-in with the taxman.

"You can succeed in doing a deal only if you are convinced about what you are seeking to achieve and also if are sure you can carry others with you -- Deveshwar has achieved both," says a fellow professional manager and CEO.

The performance of ITC has silenced his critics on the board, including one-third shareholder BAT plc, which was initially very hostile to his plans to make ITC look beyond tobacco.

While the boardroom presence of Indian financial institutions, also with one-third shareholding in the company, might have helped the settlement with the government, Deveshwar was clearly balancing two sets of critics while doing this deal.

One the one hand, BAT could well have disputed the wisdom of paying anything in view of the favourable Supreme Court judgment, while on the other, the FIs could well have applied pressure for payment of the entire sum in the light of the Ordinance.

Deveshwar can justly claim the entire credit for reconciling these viewpoints through his conviction, and, of course, his trademark combination of hard logic and charm.

Source : Business Standard

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Buy >> GRUH Finance, Madras Cements

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Infosys Vs Cognizant

The Indian software industry has grown by leaps and bounds over the past few years. It is one truly global industry that has given India global recognition, fame and acknowledgement. With its unique geographical location, global delivery model pioneered by Indian companies, labour cost arbitrage, strong English-speaking skills, highly skilled technical and managerial talent and ability to execute complex projects at optimal cost and highest quality on time, it comes as no surprise that Indian firms have been giving their global competitors sleepless nights.

However, is all this hype justified After all, India accounts for just around 3% of the global industry and global giant IBM earns annual revenues that are nearly 5 times the size of the entire Indian IT industry put together, hardware included! So is it right to give so much attention to these firms. The answer would lie in a comparison of these firms with their global competitors, in order to separate the music from the noise. We analyse how favourably (or unfavourably) industry bellwether Infosys compares with Cognizant Technology Solutions, a comparable US-based offshore outsourcing firm, engaged in providing application development and maintenance, BPO and consulting services to clients around the world.

Financial parameters -  A no-brainer ?

Infosys scores over Cognizant on most of the parameters used for comparison. It is close to three times the size of Cognizant in terms of revenues. However, it needs to be noted that this size advantage has slightly reduced over the years. In FY02, it was nearly 2.5 times the size of Cognizant. Cognizant has, in fact, grown at a faster CAGR over the time period taken for comparison, increasing its revenues by almost 55% a year on an average. Infosys has managed a pretty impressive growth as well at nearly 43%, though it has not managed to grow at the same pace as Cognizant.

In terms of operating margins, Infosys enjoys far superior margins when compared with Cognizant. However, the margins for both companies have been falling over the years. This can be attributed to the gradual movement of both companies up the software value chain, because of which there has been pressure on margins. There has also been hiring at a frenetic pace by both companies in order to scale up operations at a rapid rate in order to execute projects from clients, present and future. This has put pressure on margins of both companies. But it should be noted that margins for Cognizant have not fallen as much as they have for Infosys over the years. Still, Infosys in FY05, is expected to earn margins that are almost 10% higher than Cognizant.

Infosys earns slightly higher revenues per employee than Cognizant. However, the gap has been falling over the past few years. Even though Cognizant has been hiring at a rate slightly faster than Infosys over the years, it has still managed to maintain the revenues per employee at a stable level. This has been mainly due to the fact that it has grown its revenues at an almost equal rate over the years. Infosys on the other hand, has been hiring at a more rapid rate as compared to the growth rate in revenues. Therefore, revenues per employee have come down considerably, from US$ 51,000 in FY02 to an expected US$ 41,400 in FY05. There has been an increasing trend of hiring a greater number of campus recruits, with entry level salaries. This has resulted in a decreasing cost per employee, and is one of the levers that Infosys has used to keep costs under check.

On the return parameters, Infosys wins hands down. Its return on equity has consistently been higher than that of Cognizant. This shows the value that Infosys has created for its investors over the years, and at expected levels in FY05, is almost double that of Cognizant.

Geographical break-up

Both companies have a high reliance on North America for revenues. However, while Infosys has reduced dependence on this region over the years, Cognizant has actually increased it dependence from 85% in CY01 to 88% in CY03. This is a risk according to us, since it exposes the company to risks in that particular region. In case of any adverse event occurring in North America, Cognizant would get affected to a greater degree than Infosys.

Onsite-offshore mix

In terms of onsite-offshore mix of revenues, Cognizant has consistently maintained around 70% offshore revenues. In spite of this, margins have not improved, which could be a matter of concern. Since the company has been moving up the value chain, the margin contraction can be understood. However, even though it has maintained such a high proportion of offshore revenues, margins have fallen. Going forward, there does not appear to be much scope for increasing the offshore component. This gives rise to margin concerns, as these will either remain stagnant, or even fall marginally from current levels.

Infosys on the other hand, has seen a slight bias towards onsite work, as it moves higher up the value chain. However, going forward, as the company builds stronger competencies in high-end services, it will be able to execute them at its offshore development centres around the globe. This will result in a bias towards offshore revenues. Given the current levels of onsite to offshore revenues, there is ample scope, going forward, to increase the offshore component of revenues, and thus, protect margins.

Conclusion

Infosys compares favourably with Cognizant on most of the parameters discussed above. In terms of size, profits, margins, revenue per employee and return on capital, Infosys scores over Cognizant. However, Cognizant has managed to maintain a better growth rate than Infosys. As a result, the gap in terms of size has reduced over the years.

But it needs to be seen in another context. Infosys, when it was of a similar size as Cognizant is now, grew at a similar rate. In fact, from FY00 to FY03 when it was of a similar size as Cognizant is today, in rupee terms, it grew revenues by as much as 60% CAGR, while in dollar terms, the rate was 54.7%. Therefore, it remains to be seen as to how Cognizant manages to maintain the scorching pace of growth it has seen over the past few years.

Overall, Infosys has time and again proved its ability to grow at a fast clip even in times of a downturn. Its scalable business model, highly competent and visionary management and a highly skilled and dedicated workforce make it the star that it is. It is also making efforts to reduce its dependence on the key US market by diversifying its client base into other geographies like Europe. Going forward, given these factors, we expect the company to continue on a high growth path and it remains one of our top picks in the sector.

At the current price of Rs 2,153, Infosys trades at a forward price to earnings ratio of 19.9 times estimated FY07 earnings. Our PE band for the stock is in the range of 18x to 24x earnings. For FY07, our sell limit for the stock is thus, Rs 2,653, which is a 23.3% return from current levels. Cognizant, which is listed on the tech-heavy NASDAQ, trades at around 68 times CY04 earnings. This premium is due to the fact that it is listed on the NASDAQ. In the US markets, generally, stocks get higher valuations. Infosys ADR is also trading at a much higher PE ratio of 52.6 times earnings on the NASDAQ. This is possibly a reflection of the fact that it is a slightly more mature company than Cognizant and due to its considerably bigger size, investors do not expect it to grow at a similar rate to Cognizant.