infosys board immature

On 18 August, the Infosys board released a statement squarely blaming Mr. Murthy for the CEO's resignation, and it went a little further than that.

The board goes again:

It said Mr. Murthy has repeatedly made inappropriate demands:

It concluded by stating that the board has no intention of asking Mr. Murthy to play a formal role in the governance of the organization. What a remark.

While I read the statement I found it a bit funny, and my take on the whole drama was that it was funny. Post appointment of Mr. Nilekani as the new chairman, there was a big shuffle in the board, which was great, although there was a need for a little more. Two former CFOs of the company were apt when they said what they said. 

Then came some more funny moments with the board. On 25 August, the board made a statement again:

I read it again for the sake of clarity; I said, no, it can't be that comical; heck, it was. First, blame the guy, then say it was not the intention to blame. People around are not idiots. The height of immaturity was apparent in the 18 August statement. And  now, I don't know what to say. The better thing would have been either to retract the previous statement, or if that was not possible, at least keep mum. The board has been reshuffled already; all that is needed is to repair the damage and look to the future. 

Investors don't want the shit like, it wasn't our intention to...They are more mature. Yeah, there have been more articles on how the founders have to get off. Basically, they just don't get the point Mr. Murthy is making. You do have some rotten apples in the box, which you cannot help.

The board is in the right hands now; and we do hope that Infosys gets out of the mess.

infosys, analysts and investors

Here's the low-down on the analysts take on the Infosys stock as of today.

You could lose money on the stock according to IDBI Capital, while you could gain as much as 22% as per Jefferies. 

Is there an investor who is betting on the stock for one year? The person should be a trader, rather than investor, for the investors bet on the probability that the business behind the stock is going to do well over a long period. 

My take is that if the earnings per share grow at 5% over the next 10 years, the stock is going to give a return of about 8% including dividends, and a little more than 5% excluding dividends. 

By doing the buyback, Infosys has already done the job of EPS increase for the next year. Post buyback, Infosys will have 2173 million shares outstanding down from 2285 million. Operating earnings remaining constant, the earnings per share will increase by a little over 5%. Any upside in earnings, will increase the per share growth rate.

It is fair to say that for Infosys the operating earnings are expected to grow, not fall, even if it is at a lower rate. If it performs buybacks on a regular basis over the period, yeah, with much lower amounts, 5% increase in per share earnings should not be too difficult, again probabilistically speaking. Any higher growth rate should only increase the rate of return over the period. How much can Infosys grow? That is the question everyone has, and everyone is guessing. During these uncertain times, the guesswork is murkier. 

So, do you want it? Or, is there any other business that you can look at giving you more than what Infosys can give? Tough times, isn't it?

infosys stock, why buy it if you don't believe in it

I have long back compared Infosys with TCS, and I said I was not going to buy into these stocks as there was too much to predict. 

Then I noted in Feb 2017 on how founding shareholders have the right to ask questions of the board on corporate governance matters. I also wondered how the remuneration committee, audit committee, and board could behave in the manner they did. In April 2017, I wondered how an investor in Infosys could make 35% return; and then I wondered whether it was probable. Then in June 2017, I noted how the managers were taking desperate measures what with their take on the risk factors filed in their 20 F.

In my view, the Infosys board and its managers have become a laughing stock. They first list the founding shareholders (they call them activist shareholders) as a risk factor impeding the company's growth. Later they tell the media that the founding shareholders are their well-wishers. And now they blame the founder for the mess that they themselves have created both for the business and its shareholders. 

Any shareholder has the right to ask questions about the way the company is run. When it is from a significant shareholder, there is much weight. And when it is from Mr. Murthy, the board is better off dealing with it as a top priority. 

None of Mr. Murthy's questions have been answered; and the board has the audacity to blame him for all the shit that has been going on. The CEO resigns, and takes on a role of executive vice-chairman. The board blames Mr. Murthy. Even while the shit is falling down, there is some comic sense. 

There are questions of the former CFO severance compensation; the former general counsel and chief compliance officer severance compensation; the Panaya deal; the (former) CEO compensation; and finally, because of all this, of the corporate governance itself. As a former CFO, Mr. Pai puts it, the board has failed in its duties. 

Well, there are many who have been talking good of both the board and managers and putting Mr. Murthy down in the process. They are entitled to their opinions. Yet, transparency is the key for any business organization if it has a long enduring story to tell. Otherwise, the story has to end either slowly or rather abruptly. This is the choice every business manager has to make.

Also, what do you expect from someone who does not even have skin in the game as they say? All shares owned are free; 44,886 free shares: not a penny, well almost, put in from pocket to buy shares of the business you believe in. The CEO also has (unvested) restricted stock units. So the number of free shares are much higher. But hey, they are free.

For those who defend by saying that those shares are a part of the compensation, here's the question: If cash was given instead of stocks, would the CEO have spent that cash and bought stocks? It is ridiculous to see the chairman of the board having virtually no stake in the business. Of course, Infosys is not an exception. Yet, I would have no faith in people who do not put where their mouth is. The logic is simple: if the business fails, they do not lose anything. In fact, they might even gain by hefty severance pay.

Infosys stock fell nearly 10% today after the CEO's resignation. The equity is available for Rs.2120 b now. The analysts are all over talking about how it is either a cheap or an uncertain stock depending upon whose opinions we hear. A 10% fall in a stock is not a big deal for an investor having faith in the business and its execution. So it should really not matter if there is conviction that the growth is visible and business model is sustainable. 

If due to the CEO's exit the execution is going to be an issue, then the investor will have to weigh in, and sell the stock when the price is more appropriate. There will be some opportunities in the near future for such action although a big blown price rise may not be there.

The shareholder-board-CEO saga is not new. It has been going on for sometime. So, the investor who is skeptical of the business execution should not have bought the stock at all, or having bought it, should have sold it when the stock price hit some higher levels, which the stock did in the recent past. Equity buying is not meant for short term gigs. Have the intention to participate in the long term performance, or don't just buy stocks. 

If the idea is to trade and speculate, short term is game. In fact, Infosys is just ripe for such action. I don't believe that the returns are going to be great by owning the Infosys stock. May be just about the market index; or slightly higher if lucky. I do like to trade in it though. Speculating with some insignificant cash is both fun and thrilling. The returns are also going to be insignificant. And on top of it, I get some comical scenes like the one going on right now. 

Of course, I noted in Feb 2017 that stock buybacks are good only when the company has excess cash and the stock price is lower than its intrinsic value. Is the stock price still cheap? 

amazon, is that a hype

At $986.92 per share, Amazon's equity is worth $474 b. Beginning 2013, it was $121 b; 2014, $182b; 2015, $137 b; and 2016, it was worth $270 b. Beginning 2017, it was $379 b. Is there any stopping to this story? The world has been bullish on the Amazon story, and for too long; threatening every business, they are asking, is Amazon coming for you? Is this going to be true, or all hype? 

I have been valuing Amazon for long, and every time, I must admit, I have found the stock to be overpriced. Noting about it in March 2013, I asked if anyone knew it in advance.

In February 2014, I wondered how long is long term for Amazon, which was worth $160 b at the time.

I acknowledged in May 2015 that it is indeed a disrupting business; but then, I noted that the business is yet to make money. At $200 b market value, the storyline was this, and continues to be so:

In September 2015, it was time to talk about price and value. At $235 b market value, Amazon was on its course, as per Analysts of course, to move past $300 b. 

I compared Amazon with Berkshire Hathaway in July 2016, and noted the differences in price and value. Both were priced by the market at $350-360 b at the time. 

And I did ask the question, again, where's the cash?

And by March 2017, we were talking about how Jeff Bezos could become the first person to be worth $100 b as Amazon goes past $600 b.

I also noted that the market, if not the business itself, has the potential to take Bezos past $100 b.

Now we are in August 2017, and Amazon just released its June quarter results. As of June 2017, it had cash of $21 b, and operating assets of $9 b. Such low operating assets was due to its reliance on supplier payables of $35 b. You have to wonder about its business model, after all. The non-cash working capital is negative $21 b, amazing indeed. There is a long term debt of $7.6 b. It has only $42 b of long term assets excluding goodwill.

With $9 b in operating assets, Amazing is ruling the world, what with the market capitalization of $475 b. While shareholders have put in only $23.2 b, net of cash it is hardly anything. Put in another way, if it pays off its debt, the balance sheet will look like this:

Operating assets $9 b; Cash $ 14 b; and Equity $23 b.

Can someone with $9 b available for investment replicate its business model and disrupt Amazon? It looks so simple, yet so formidable. Book $9 b, market $475 b; is there some mismatch here? Alright, I am manipulating a bit; you can add another $15 b, which is approximately the accumulated depreciation to date. Still, $24 b of investment and you get $475 b in market value is something to ponder over.

The only profitable segment for Amazon is its AWS, which includes cloud computing. AWS is about 10% of consolidated revenues, but contributes entire operating profits.

Operating profits: North America made profits of $1032 m and International segment suffered losses of $1206 m, resulting in Amazon's operating losses of $174 m for the 6 months ended June 2017. It is only after AWS you see the consolidated operating profits turning positive to $1632 m.

AWS made operating profits of $1806 m for the 6-month period. The question is, why AWS should be Amazon? Both are, sort of, unrelated businesses. If AWS is incorporated separately, the market will have explicit numbers, and therefore may be more rational in pricing equity. AWS is an IT solutions business and therefore will have to be valued as such.

Amazon is an online retailer competing with both other online e-commerce and brick and mortars like Walmart. Then we can see clearly that Amazon is yet to make operating profits. Although it is generating operating cash flows, we do not know how much of that is attributable to AWS.

Excluding AWS, Amazon had revenues of $66 b for the past 6 months. How much can these grow in the next decade, or even after that? Of course, the world is its market. Yet, how much? What would be its long term operating margins? There are lots of questions of Amazon as a business, and much more of the market's expectations and pricing.

While there are more bullish on Amazon, we also find some who are on the other side of the story. And with this kind of market pricing, they are not very happy. Is it going to fall, or is Bezos going to be the richest guy on the planet? That's a trillion-dollar question.