Tata Consultancy Services Listing on the NYSE?

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April 24, 2007 | Stocks | Author Asif

Less than two years ago, Ratan Tata, the head of the Tata group, made the following comment about listing Indian consulting and outsourcing firm Tata Consultancy Services (TCS) on an international market,

“We always visualized TCS as needing an international listing and expect to have an international listing. The underlying reason is that if TCS wanted to make acquisitions, it would need currency.”

As you can see from this list, while the Tata group as a whole has been on an acquisition binge since 2001, TCS made just one small acquisition in 2006 by taking over Australia based TCS Management for AUS $15 million (to be paid over a 5 year period). In contrast, competitors Wipro and Infosys were more active. Wipro acquired Portugal based Enabler for $53.3 million; Finland based Saraware for $32 million and Quantech Global for an undisclosed sum. Infosys acquired Citibank’s 23% stake in Progeon Limited for $115 million, making Progeon a wholly owned subsidiary of Infosys.

While both Wipro and Infosys have an adequately stocked acquisition war chest with well over a billion dollars in cash and investments on their rock solid balance sheets, TCS only has roughly $266 million ($1 = 41.65 Rupees) in cash and short-term investments on its balance sheet. An international listing would certainly help TCS go after bigger acquisitions as organic growth slows down and there have been rumors that TCS may list its shares on the NYSE soon.

With 2006-2007 annual revenues of $4.3 billion and net income of $950 million, a NYSE listing for TCS is likely to generate a lot of interest. I have created a table that compares the key statistics of the major Indian IT firms using the 2006-2007 income statements just like I did in the June 2006 edition of SINLetter.

Comparison of Indian IT Companies (April 23, 2007)

Infosys (INFY) Wipro (WIT) Satyam (SAY) TCS (TCS)
Price/Earnings 36.02 35.27 27.91 29.51
Price/Sales 9.91 6.88 5.70 6.54
Annual Revenue Growth 43.59% 45.24% 33.30% 40.68%
Annual Earnings Growth 53.15% 48.39% 19.65% 43.30%
Annual Revenue $3,090 million $3,467 million $1,461 million $4,300 million
Annual Earnings $850 million $676.77 million $298.4 million $950 million
Profit Margin 27.51% 19.52% 20.42% 22.09%

Based  on its growth and margins as well its leadership in revenue, TCS appears to be attractively valued when compared to Wipro or Satyam. The higher valuation of Infosys appears justified on account of its industry leading profit margin and strong balance sheet. However if you are an institutional investor or a Non-Resident Indian (NRI), you would be better off buying TCS on the Indian market rather than waiting for an NYSE listing because of the premium usually associated with the American Depository Receipts (ADRs) of Indian IT companies.

Infosys ADRs currently trade at a 7.97% premium to its closing price on the Bombay Stock Exchange (BSE), while Wipro trades at a whopping 21.79% premium to its closing price on the BSE.

It is important to note that there are multiple risks associated with buying TCS at this point,

  • The Indian rupee, which has long been pegged against the dollar, has been gaining strength in recent weeks. With more than 50% of revenue coming in from the United States, this is going to hurt earnings at TCS and other Indian IT companies.
  • Employee turnover continues to remain high with an attrition rate of over 11%.
  • Rising inflation (residential mortgage rates are over 12.5%, yikes!), rising wages and a highly volatile stock market are some of the other risks that to be kept in mind while investing in India at this juncture.

Full Disclosure: I hold a long position in Wipro but have been slowly reducing my stake over the last few months.


Hans Wagner’s Response

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April 10, 2007 | Stocks | Author Asif

For those of you who have been following the discussion sparked by my previous blog entry titled Imitation, The Best Form of Flattery?, given below is Mr. Wagner’s response reproduced here with his permission.

“This situation was brought to my attention by one of my members. First, I take full responsibility for this problem. I do not condone any type of copying or plagiarism. In my next email tonight I will ask Seeking Alpha to remove the EMC article, taking responsibility for what happened, explaining how this happened, and what steps I am taking to assure it will not happen again.

Now I want to explain how this occurred. I hire Business graduate students from a local university to perform some research for me on a part time basis. I like to use students to help me as it provides them a way to learn about investing and gives them some work experience. This is with the approval of a professor who sponsors the students. Normally each student works about 5 to 10 hours a week, depending on their class schedule.

This semester I hired two students who do some basic stock research. Normally, they follow my thoughts, though I also encourage them to come up with their own ideas and bring them to me. We meet weekly to discuss current ideas and they present the research that they have performed. We then decided what stocks to work on over the next week.

One of these students brought ICON Clinical Plc (ICLR) to me in early February. I liked the idea as I often seek unknown companies that have the potential to do well. After more extensive research I added ICLR to my watch list and on February 15, 2007 I added it to my Premium Aggressive portfolio informing my members by email of the decision. I set the price at 42.90, the high of the day to help account for slippage and commissions. I did not know that you had also recommended ICLR. I also was unaware that you mentioned the ICLR article in your March 2007 newsletter. While I am a subscriber to your newsletter, it is placed in the “reading when I have time” folder. I rarely get to these emails, including yours and usually end up deleting the emails after several weeks.

I do not hold anything against this student for using your newsletter to get stock ideas. I just would have liked to known the source. I was told by this student that he got the idea from a recommendation from a friend who works for a biotech firm. He said his friend has contracts with this company and likes their service.

Regarding EMC Corporation (EMC) I had identified this company in my Themes for 2007 commentary for my Premium Members. I believe that in general technology companies do not do well in the first half of the year and then do much better in the second half of the year. My intention was to do more complete research on EMC later in the spring or early summer of 2007.  If I liked what I found, I would  add it to the Premium Members Watch List.

After reading about the EMC IPO of VMware in early March, I became more interested in researching the company earlier than I originally planned. In our weekly meeting with the two students in the middle of March 2007 I asked the same young man mentioned earlier to do some basic research on EMC. I use much of their material as well as my own research to prepare a detailed write up of each company I decide to include on my watch list. I also try to write an article on the company that I send to Seeking Alpha. These students know how the material is used and they also know of the articles I write. This student asked if he could help with the article and I said that would be fine. I had completed most of the work on the detailed write up on EMC and had scheduled to release it on April 4, 2007. It usually takes a couple of weeks of work to complete these write ups, as there is a lot of reading, listening to conference calls, etc to do. The next week on April 3rd, he came back with a draft of an article that was quite good (it turns out that this article was a copy of your piece on EMC from your news letter). I inquired how he did such a good job on this article and he replied, just hard work. I congratulated him on a job well done and asked if it would be a problem if I did not use it verbatim. He did not mind, though I told him he should plan on writing an article on another company in the near future. I rewrote parts of this student’s draft article and submitted it to Seeking Alpha to coincide with the release of the EMC write up on my watch list for Premium Members. That is the one you discovered that looked just like yours. I also added some lines from this article to the detail write up on EMC. I will remove these and make other adjustments as well to remove any hint of a copying problem. I am considering removing EMC from my watch list as well; to further separate my site from the problem.

I apologize for this problem and as I said at the beginning I do not condone copying of any kind. I am a graduate of the US Air force Academy and I live by the Honor Code they have: “I will not lie, steal or cheat, not tolerate those among us who do.” I am meeting with this student and his professor on Tuesday to address the problem. I am also developing procedures to prevent this type of problem from ever happening again. Unfortunately, it will probably entail limiting the kind of work I can ask of these graduate students, but that is the price we must pay.

I am also reviewing all your emails to be sure there have not been any other problems. I do not suspect any, as in my quick look at the companies in your portfolio; ICLR and EMC were the only ones that showed up. To be sure you are comfortable that I am not copying your ideas I am giving you full access to the Premium Members site for life. Should you find any problems, please bring them to my attention and they will be corrected immediately. I believe you are an honorable man and will not borrow my ideas inappropriately.

Regarding my site, I believe I offer a quality service that includes substantial research on each company with only 20-30 ending up on the Watch List. I then let every member know in advance of when I am making a buy or sell via email. Each buy is priced at the high of the day to allow for slippage and commissions. Each sell is at the close of the day. I also offer updates on the companies including stops, when to sell part of the shares and other pertinent information. Every trade is documented and made available. Each member receives a weekly market commentary that includes a thought for the week, as well as economic and trend analysis of the markets. I also include personal service answering each member’s questions. One of my goals is to teach members how to invest so they are more prepared to handle this important task on their own. They cannot depend on their company pension plan or the government to provide financial independence. I receive very good feedback and have a very high renewal rate. I believe the site offers a very good value, when compared to all the other fee based sites. I welcome your comments and critique.

I hope you understand how this problem occurred and recognize that it was not intentional nor part of an effort to copy your intellectual property. Please let me know what I can do to further correct this situation. I look forward to hearing from you.”

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Imitation, The Best Form of Flattery?

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April 4, 2007 | Stocks | Author Asif

A couple of months ago, I decided to feature an Irish medical research company called ICON plc (ICON) in the February 2007 edition of my free investment newsletter. The focus of that newsletter was closed-end funds and while I decided to add ICON to the SINLetter model portfolio, I was only able to write very briefly about the company due to time constraints. There was very little mention about ICON in the mainstream financial media and the only reason I discovered this company was because I noticed its hiring activity while looking for a new IT project. A few days after writing about ICON, I noticed this article on SeekingAlpha by Mr. Hans Wagner, who runs a subscription based stock picking website called Trading Online Markets.

While I was surprised that someone else decided to write about this little known company shortly after I wrote about it, I was thrilled to see that Mr. Wagner’s article covered ICON in greater detail and I mentioned it to subscribers in the portfolio performance section of my March newsletter.

A month later, I decided to write about EMC Corp (EMC) in the April 2007 edition of SINLetter primarily because of EMC’s decision to file an IPO for its subsidiary VMware this summer. Imagine my surprise when I noticed this article about EMC in SeekingAlpha by Hans Wagner less than a week after I sent my newsletter out to subscribers.  I was not surprised by the fact that Mr. Wagner decided to write about EMC and the VMware IPO, which was commonly known to many market observers, but by the actual content of his article. To illustrate my point, check out the following paragraphs from my writeup about EMC,

“Beyond the data storage business, the reason I am interested in EMC is because of a subsidiary of EMC called VMware that was acquired by EMC in 2004 for $635 million. VMware sells virtualization software that allows companies to run multiple “virtual” machines on a single server or on distributed hardware. Virtualization allows companies to utilize hardware more effectively and this is something that is very appealing to power conscious large enterprises. AMD took market share from Intel primarily because of its power efficient line of server chips last year (if you live in the San Francisco bay area, you may have seen the huge AMD billboard on highway 101 advertising this fact). Beyond hardware efficiency, VMware also allows companies to rapidly deploy and easily maintain these virtual machines. VMware is expected to have sales of over $1 billion this year and is sometimes referred to as the fastest growing software company on the planet.

EMC has decided unlock value in its VMware subsidiary by deciding to file an IPO for VMware this summer, representing 10% of its stake in VMware. EMC’s IPO of VMWare could be valued anywhere between $600 million to $1 billion, giving VMware a valuation of between $6 billion to $10 billion. This is more than 10 times what EMC paid for VMware just three years ago and represents close to one third of EMC’s $29.2 billion market cap.”

and the following paragraphs from Mr. Wagner’s article,

“The primary near term reason I am interested in EMC is their VMware business that EMC acquitted in 2004 for $635 million. VMware virtualization software allows companies to run multiple “virtual” machines on a single server or on distributed hardware. This allows companies to utilize hardware more effectively and this is something that is very appealing to power conscious large enterprises. Beyond hardware efficiency, VMware also allows companies to rapidly deploy and easily maintain these virtual machines. VMware is expected to have sales of over $1 billion this year. Some refer to VMware as the fastest growing software company on the planet.

On February 7, 2007 EMC announced they intend to IPO 10% of its stake in VMware sometime during the summer of 2007. This IPO of VMWare could be valued anywhere between $600 million to $1 billion. This would give VMware a market value of $6 billion to $10 billion, more than 10 times what EMC paid for VMware in 2004. EMC’s market cap is $29.8 billion market cap, making VMware worth a third of the company.”

People have borrowed my ideas in the past and I have borrowed ideas from other investors. In fact the famous investor and founder of Fisher Investments, Philip Fisher also mentions other investors as a source of ideas in his book Common Stocks and Uncommon Profits. But it is highly disrespectful to borrow both ideas and content from a free website without permission or acknowledgement and then make your subscribers pay for those ideas and content.

One might wonder why I would be concerned about my content being copied given that SINLetter is free and I allow websites like SeekingAlpha to redistribute my content. While I have not yet determined what I would like to do with SINLetter, I am trying to build a track record and traffic in case I decide to launch a fund or a subscription service in the future. Someone using my content without permission or acknowledgement does not help my goals in the least bit and can actually have a negative effect as illustrated below.

My content being reproduced without my knowledge has already happened twice in the past but I did not write about it on this blog. The first time this happened, a website was posting my entire newsletter without permission and all of a sudden SINLetter disappeared from search engine results because Google and other search engines imposed the “duplicate content penalty” on my website. I asked this website to stop posting my content and after a few weeks my ranking was restored on the search engines. Given that almost a third of my traffic comes from search engines, it can be clearly detrimental to have almost all your content copied by another website.

While I cannot claim that Mr Wagner did something similar, I felt that it was time I spoke up about this so that subscribers to websites like Trading Online Markets would realize exactly what they are getting for their money.


Carnage on Wall Street

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February 27, 2007 | Stocks | Author Asif

The correction in the market that many market observers have been talking about for months finally occurred today with the Dow Jones Industrial Average falling 416.02 points or 3.29% in a single trading session, the biggest one day drop in more than 5 years. At one point during the day, the Dow fell as much as 200 points in just one minute. The Nasdaq fared even worse that the Dow, falling 96.66 or 3.86% today, wiping out all of its gains for 2007. Not a single sector of the market was spared and commodities like steel, silver and gold were the hardest hit.

Every single one of the 23 individual stocks I hold in my personal portfolios were in the red and the SINLetter model portfolio, which was showing a gain of 95% (since inception) yesterday, retreated to a gain of 87.01% since inception. The only saving grace were the put options I picked up for the model portfolio as described in the section Hedging The Economy Through LEAP Puts. The put options for the mortgage lenders Countrywide Financial (CFC) and New Century Financial (NEW) are now up 78.86% and 447.22% respectively.

So what caused this sudden drop in the markets? It is usually hard to pin the movement of the market to a single factor and it is actually quite amusing to watch the media try to explain why the market moved in a certain direction almost every day. Amongst many other factors, the following events were weighing down the market today.

I was having a tough time finding two new stocks to feature in the March 2007 edition of SINLetter, which is due out in a couple of days, either because valuations were too high or the sector was facing a slowdown. A stock screen I ran last week finally brought up a company that appears to have excellent prospects and this market correction has made it even more attractive. If you are a subscriber, you should get to read about it when the next investment newsletter is sent out on March 1st. I plan to continue staying away from mortgage lenders, home builders and transportation stocks and focus on large cap or dividend paying stocks for the near future.


Stocks and ETFs That Appear Ripe For The Picking

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February 14, 2007 | Stocks | Author Asif

A subscriber recently wrote to me asking me to suggest five stocks from the SINLetter model portfolio that I liked best so that he could start a new portfolio consisting of these stocks. Since I am not a registered investment advisor (RIA), I cannot legally offer individual investment advice and even RIAs cannot offer investment advice to individuals by email unless they already have an existing relationship with them.

This makes a lot of sense, as each investor may have different goals and risk tolerance levels. While a high growth and very volatile stock like Suntech Power (STP) may hold a place in the portfolio of an investor with a long investing horizon, it may not be appropriate for an investor who has to withdraw funds in the near future to pay for a child’s education.

Portfolios could also have various financial instruments like stocks, mutual funds, ETFs, closed-end funds, REITs and options to achieve diversification, maximize returns or to manage risk. Asset allocation (60% stocks, 30% bonds and 10% cash for example) is just as important as picking the right stocks or the appropriate financial instrument. Exploring these areas and concepts is beyond the scope of this blog and the following resources should prove helpful to investors who are interested in learning about them.

  1. The book Beyond The Basics by Mary Farrell.
  2. The excellent articles and blog of Paul Merriman.
  3. The asset allocation articles by Geoff Considine on Seeking Alpha.
  4. This gloomy but eye opening article on the Skilled Investor blog.

Getting back to the question asked by the subscriber, here is a small list of stocks and ETFs borrowed from the model portfolio, my list of Ten Stocks for 2007 and beyond that I would personally consider investing in right now.

Name Symbol Price* Comments
Medifast MED $8.79 This high growth company has been hurt by a couple of negative articles in Barron’s but looks inexpensive at these levels.
RealNetworks RNWK $10.35 A 74% increase in sales of MP3 players at SanDisk in Q4 2006 should bode well for RealNetworks. I expect the company to report strong results on Feb 14th.
Nautilus NLS $18.14 My recent blog entry says it all.
Electronic Data Systems EDS $28.27 High demand for data storage and expected margin improvement in 2007.
Barclays BCS $60.96 An excellent 3.4% dividend yield combined with strong growth in its ETF business makes this London based bank attractive.
PowerShares Water Resources Portfolio PHO $19.13 An ETF that invests in companies involved in the treatment and consumption of water. Potable water is becoming a highly valuable commodity in the developing world.
iShares MSCI Malaysia EWM $10.68 As the name implies, this ETF should allow you to capture the growth Malaysia is currently experiencing.

* Prices as of Feb 13, 2007.

Please note that both Nautilus and iShares MSCI Malaysia Index have appreciated a lot over the last few weeks and could be susceptible to a pull back. Consult with a broker or financial advisor before taking any action on any of the securities mentioned in this blog entry.

Voluntary Disclosure: I own shares of Medifast and may start a position in RealNetworks before quarterly earnings are announced on Feb 14th.

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