“Indian IT services cos have most robust demand outlook for next 5 years. We try to invest in companies which can deal with cost inflation and give a top line growth of around 20-25% translating into consistent bottom line growth of 20-25%. That is not going to be easy and therefore we focus on market leading franchises such as Bajaj, Titan and TCS so that we can continue generating for our clients consistent 20-25% compounding, says Saurabh Mukherjea, Founder, Marcellus Investment Managers. 6% down for TCS, are markets indicating that in the short term things have run up really ahead of themselves? TCS numbers are marginally off their estimates, but does a 6% fall indicate that things are looking overheated and need to calm down now?Honestly I really do not have much concern about near term market movements. I have never been that focussed on day-to-day stock price movements neither in names like TCS, nor in Titan. It neither excites us nor does it worry us when these sort of things happen. In TCS’ case, I think the business looks stronger than it has done in the last 20 years. For the last 20 years, it has been a phenomenal company. It is a company growing earnings at close to 30% in an industry where attrition rates for the IT services companies are 15% or higher; TCS still has an attrition rate of around 11%. Free cash flows have compounded for this franchise at 25% for the last decade. In fact, for the last two decades, it has compounded free cash flows at 25%. You speak to any global IT services company outside India and this is the Indian IT services company they fear the most. TCS’ competitive advantages on the training, recruitment and retention side are formidable. They train, re-train around two-and-a-half lakh workers a year. It is a powerhouse franchise, very strong competitive advantages. I do not think I am going to lose that much sleep about what the market is doing to TCS today. We have owned it in several of our both onshore and offshore advisory portfolios and we continue to be steadfast believers that this is the powerhouse franchise, the powerhouse franchise in Indian IT services. What is the right way to look at IT stocks because I do not think anybody is questioning that the relevance of IT post pandemic has only increased? The debate is whether valuations are stretched or future returns have to be diluted given the recent run up.With all due respect, I do not think there is a debate there. Here is why I do not think it is a debate; maybe five-six years down there could be a realistic debate on the subject. At this juncture, it is not. If you see the needs of the Fortune 500 companies where they have to digitise their businesses, re-invent their businesses comprehensively for the world of mobile technology, for the world of cloud technology. The sheer amount of work that the Fortune 500 companies have to give means that for the top four, five Indian IT services companies, the next five years their main challenge will be to get enough workers. The challenge is not to have bulging order pipelines. In the next five years, Indian IT services sector has probably the most robust demand outlook it has ever had. The challenge on the supply side is can you get enough trained workers to fill the insane amounts of work that is coming from the western world and there we believe TCS is better positioned than any other Indian IT services. Cognizant last quarter said that they were turning away business because they cannot get enough people. Well known Indian IT services firms are reporting 15-20% workforce attrition. So if you have a five-year outlook where demand is not a problem, you get bulging order books growth in business running at around 15% YoY on a dollar basis and net profit growing at 20-25%. I do not think valuations can rationally be explained as a concern, the concern is can you keep you operating margin? Can you protect your operating margin from labour costs escalating as finding workers gets harder and harder? Are you delighted and also positively surprised with the kind of commentary we have got from Bajaj Finance in terms of lending picking up, Titan in terms of how jewellery sales have normalised, Sobha or Lodha indicating that their quarter gone by has been one of the best in the industry? Despite the shattering impact of the second wave, the consumer is not in the shell. There is a serious wealth and that is getting captured in the way the consumer is spending.We are delighted, not surprised. We are not surprised because as far back as middle of March 2020, we were shouting to anybody who was willing to listen that Covid should not be a source of panic; the Indian economy is robust and resilient. India’s demand is robust and it will recover quickly from even the exigencies of Covid. We said it when the market was in free fall. We said it when the first lockdown was under way. We said it when the second wave came and we will continue saying that this country has very strong demand fundamentals. In addition to strong demand fundamentals, the country is formalising. Every sector is formalising first and then it is consolidating. If a sector formalises and then consolidates, all we have to do is look for the top one or two players who have decisive competitive advantages, good governance and sensible management. We load up on those stocks and benefit from the consolidation of the economy alongside the recovery of the economy. I was amongst the people fortunate enough to be standing in the domestic airport on Friday morning when there was something like 90,000 passengers queuing up and it was a bit of a hassle for me but as I was queuing up with 90,000 people! I spoke to half a dozen people in the queue. Some were running hotels, some were running factories, some were running hardware stores. Demand is soaring across the economy, not just for the elite end of the spectrum, demand is soaring across the economy and the companies like Bajaj Finance, Titan which are in our portfolio are amongst the many beneficiaries. I think the next two years demand is not the concern. We try to invest in companies which can deal with cost inflation and give a top line growth of around 20-25% translating into consistent bottom line growth of 20-25%. That is not going to be easy and therefore we focus on market leading franchises such as Bajaj, Titan and TCS so that we can continue generating for our clients consistent 20-25% compounding.

By admin