This Indian Company May Be Worth the Single-Stock Risk (original) (raw)

I wrote on Wednesday that investors seeking emerging-markets exposure in Asia should turn their attention from China to India and Indonesia. The challenge in both of those markets is identifying appropriate companies as investment targets.

There is hefty single-company risk in any emerging market. That's particularly true in India, where corporate-governance standards only recently have begun to improve.

Anyone holding stock in Adani Enterprises (NSE) or its member companies can testify to that hard reality. The whole group's shares sank after Adani was hit with a short-selling report from Hindenburg Research that questioned the group's accounting, as I explained in January.

In particular, Hindenburg questioned whether the group has been round-tripping cash into 38 Mauritius shell companies controlled by founder Gautam Adani's elder brother, Vinod. After the group invested into those shell companies, the shells invested the money back into the Adani Group, Hindenburg believes, inflating the share prices. The shell companies appear to have no other obvious operations, Hindenburg states.

Adani countered that the "malicious" report dredges up old allegations that already have been investigated. While Adani claims there's no truth to the matter, an Indian regulatory investigation was inconclusive, and Adani notably has not countersued to allege libel or a malicious attack.

One of the few Indian companies that appear above board is Infosys (INFY) . The Bangalore-based information technology company rivals Tata Consultancy Services TTNQY as the largest Indian tech company. Infosys is a major player in IT outsourcing, and in 2021 became only the fourth Indian company to reach US$100 billion in market cap. It has now shrunk back to US$67 billion but is a tech behemoth nonetheless.

Investors looking for an in with Infosys may find now an opportune time. The company's shares fell as much as 10% here on Friday and were trading down 7.7% as I write this piece. That decline is leading today's losses on the Nifty 50, which is down 0.9% as a result. Today's decline in Infosys is its largest in around three months. The stock is now trading down around 12% for this year.

The catalyst is that the company has just cut its full-year growth outlook by half. It also posted a weaker-than-expected first-quarter profit, although profits still rose 11%. Sales were up 10% in the quarter.

This stock would have to be a long-term India call. Brokerages have been downgrading their rating on the company, and clearly Infosys is challenged in the near term. It has cut its full-year revenue growth forecast to a range of 1% to 3.5% from a prior range of 4% to 7%.

The company's CEO, Salil Parekh, said the companies that are its clients have been delaying decisions on IT outsourcing and services based on the cloudy macroeconomic climate. Inflation pressures have been weighing on its clients, inducing them to slash spending on services.

"In the short term, we see some clients stopping or slowing down transformation programs and discretionary work," Parekh said at a news conference. "This is especially so in financial services, in mortgages, asset management, investment banking and telecom. We also see some impact in high-tech industry and in parts of retail."

But companies can only hold off IT support for so long. Demand will return now that inflationary pressures are easing almost worldwide. The tough economic climate is a short-term factor that should not hold back the company's long-term prospects. The macro climate doesn't change the fact that Infosys is a market leader in the industry, with a lower cost base for its Indian operations than other overseas competitors.

Tata Consultancy is also warning of uncertain demand from clients. Smaller Indian rivals Wipro (NSE) and HCLTech (NSE) are also projecting muted growth.

International rivals include Accenture (ACN) , now headquartered in Ireland, and Cognizant Technology Solutions (CTSH) , which actually was founded in India but is now run out of Teaneck, New Jersey.

It's likely the tough conditions will continue for IT for another 12 months. In the long run, though, Infosys will benefit from the rise of big data, artificial intelligence and machine learning, leading to greater demand for its services to take care of all that tech. Its clients will be using those techniques to boost profit margins, which in the long run will boost Infosys operations, too.

Investors should wait for any apparent uptick before buying into Infosys, and if the lull will last a year, it's not an immediate buy. But as we have seen with U.S. chipmakers, the tide can turn in a hurry, leading to large gains once macro conditions for the company do improve.

At the time of publication, McMillan had no positions in the stocks mentioned.