Friday, January 19, 2007

infy and its growth

I always had a gut feeling that Infosys's growth in revenues and income has only come by adding more employees.  I had a brief discussion about this with one of my close friends and an Infosys employee, Raghu.  After the discussion, I went back and pulled off a few numbers.  I present them here.  The numbers represent year-on-year growth as a fraction for each of the three columns.  For example, rwo1-column1 should be read as revenues increased by 77% in 1998 compared to 1997.



Revenues

Employees

















 Income



1998
0.77016
0.445681
















0.52038


1999
0.674118
0.430961
















2.47148


2000
1.003378
0.824272
















0.987837


2001
0.314356
0.092259
















0.604141


2002
0.413755
0.434159
















0.398577


2003
0.409625
0.668831
















0.597255


2004
0.498233
0.431907
















0.213617


2005
0.351759
0.432473
















0.460251





As you can see Infosys was only able to sustain consistent growth by continuously increasing its workforce size.  Well, it might not be too troubling to everyone.  However, an almost linear relationship between growth in revenues ans employees is troubling given that Infosys is already 50,000 big with 2.1 Billion USD in revenues - that roughly translates to 42,000 USD in revenues per employee.  Firms like EDS that Infy compares itself with are close to 171,000 USD in revenues per employee at a scale of 20 Billion USD in sales and 117,000 in work force size. 

Let us do a small calculation.  Even if Infy were to become half the size of EDS at an average growth rate of 55% it will be 2010 and its work force would be 246,000 in number (at an average growth rate of 47%).

To reach 20 billion in revenues Infy will have to employ around 360,000 employees.

Well, all this after assuming a consistent growth rate for the next five years.

Can Infy manage 360,000 employees the same way it did 50,000 ?  Are there limits to organization?  Given the rate of growth in India, there is bound to be inflation and rising incomes. How will Infy cope with rising costs of hiring, training and sustaining talent.

Given its current strategy of adding more people to achieve growth, Infy seems to be going towards a inevitable doom.  It is bound to hit a limit in terms of organizing workforce.  It needs more managerial talent and really good quality levels and my bet is that this is not there in the foreseeable future.

There has to be a change in the current strategy.  I don't know how it will come - maybe products, maybe more value-adding consulting.  What I do know is that managing 360,000 employees and bringing in 20 billion in revenues is not going to be the future for Infy.

Maps of War

Check out this site.  I really enjoyed the maps !

So much for reliability - Toyota Recalls

I own a Saturn. I always tell everyone I know that they should give American cars a good shot :).  Japanese cars are often given too much credit with respect to reliability than they actually deserve.  Customers are willing to pay premium for the "perceived" reliability of Japanese cars, while they could have actually bought a lower priced model for almost the same reliability.  Read this report on a new Toyota product recall.

I have always argued that with size come problems.  Just on the verge of closing in on GM as the world's largest automaker, Toyota seems to be hitting the quality wall.  Not that I want Toyota to fail, but consumers should not come to expect Toyota of being able to make all types of cars ( i.e, match GM's product diversity) and deliver exceptional quality (like in the Corolla) at the same time.  It would be interesting to see what happens this year, if more such problems arise at Toyota.

Thursday, January 18, 2007

products and pricing

The market reacted quite appropriately to new regarding Apple's revenue announcement and its shares are down almost 5% today.   However, wrt to Redhat .. the market was not nearly right - further pushing the stock down.  Sun's announcement to cut pricing on its Solaris support hit Redhat badly. I took this quote off Matt Assay's article here.

Products compete over the long-haul. Pricing does not.


RedHat is here to stay.  It will be a good alternative at least in the server world to mainstream corporate offerings.  There are some things which are too important to be left to the interests of investors. The genome project for instance. It need to be in the public domain for the greater good of "consumers", applied in the broader sense of the word, and society in general.  We really don't want Pfizer owning the IP for the human genome decoding.

Operating Systems are almost close to achieving that status and I hope we all realize that soon enough.

Go Long and Stay Long

My father-in-law is one of the best investors I have seen. His rate of return on investments is unmatched - stocks, funds and real estate. His strategy - invest for the long-term. He has figured out the true underlying nature of the stock markets - randomness. The objective is not to reduce uncertainty but to develop a strategy to effectively deal with this uncertainty.

Here's a reference to a good book that deals with randomness of the stock market and a review on NY Times about it. If you have been planning to get to the next Google before it takes off - all I have to say to you is that you are being very optimistic about your success in finding the next Google. Robert Merton's portfolio problem under certain assumptions shows that to maximize expected lifetime utility the fraction of income to be invested in a portfolio is independent of the age of the investor. So, get going. It does not really matter when you start. You never missed anything and that's the truth. For an investor in the long term, there are bound to be hits and misses. If an investor has spread his/her own risk reasonably (say 60% stocks and 40% bonds - young ones like me), there will be sufficient avenues to generate good returns.

As the author suggests you are better off gravitating to index funds. Index funds slavishly follow a index such as the S&P for example and given the collective wisdom of the market, in the long run they have been really good at delivering a consistent return, higher than for example funds that are managed actively by "managers". There are hundreds of these index funds and they all have intriguing names - vectors, diamonds, spiders. Apart from the broad based index funds, there are also specialty index funds that follow sectors, industries etc. You might also want to check out ETFs. Fin instruments such as ETFs and index funds give novices like me better ways of managing risk. ETFs trade on the stock market just like stocks and can be traded in real time. They also give investors such as me an option to look out for boutique investments in specialty baskets of firms and sectors. ETFs however are not free of volatility and therefore risk. FXI - China 25 ETF is a good example - it has grown over 30% in the last 3 months. However, it does provide an investor an option to invest in a broad set of Chinese firms instead of just PetroChina od China Mobile.


For a comparison of ETFs, mutual funds and index funds - follow this link here.

Wednesday, January 17, 2007

Dani on liberalization

Read this article on financial liberalization here.
 

Dani makes an interesting point that what the developing countries really need is the entrepreneurial spirit and low propensity to invest in plant and equipment.  I cite from the main article,
Capital flows appreciate the domestic currency and make production in export activities less profitable, further weakening the incentive to invest. China and India which largely avoided capital inflows from the developed world, managed to keep their currencies strong, thereby keeping profitability and investment strong.
Clearly, there are some advantages to caution and looks like India's caution in encouraging capital flows, although the consequences of which were not probably foreseen, did help boost India's economic interests.  One could also make an argument that the market really knows the best solution to the optimum extent of capital flows and what we have seen in India and China is the result of this market solution. 

Cost of War

I found this article on NY Times.  1.2 trillion dollars is for sure a large amount.  To put it in perspective, GDP of India is around 750 billion USD:).  All in the name of a free Iraq.