Speaking to CNBC-TV18, Hugh Young, Managing Director of Aberdeen Asset Management-Asia, said the glory days of healthy IT returns were over.
The recent strife at Infosys raises many question marks and is a cause for concern, said Hugh Young, Managing Director of Aberdeen Asset Management-Asia, one of the largest foreign institutional investors in Indian markets.
Speaking to CNBC-TV18, Young said that the conflict between the Infosys founders and the software major’s board over corporate governance and severance payments to former top executives was not particularly healthy.
“We would prefer agreements and consensus over disagreements and cross-accusations,” he said.
He said the row was bound to distract the management from carrying out it main task of ensuring profitability.
Young said the news that Infosys’s peer Tata Consultancy Services was mulling a buyback of shares was good news as it has a strong balance sheet and surplus cash, adding that other IT companies may follow suit.
He said that the glory days of healthy IT returns are over, which is evident from the ratings on stocks.
Young also said that he was surprised by the good performance of the Indian markets in the three months since Donald Trump was elected as US President, adding that Aberdeen was as keen on the Indian market as before.
He said that given the recent performance of telecom stocks, Aberdeen often wished it wasn't in that space.
Below is the verbatim transcript of Hugh Young's interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal.
Anuj: I want your thoughts on Tata Consultancy Services (TCS) and Infosys since you are large investor in both of them. What is your reaction to the buyback news of TCS and do you get a sense or are you in talks with the management of Infosys to announce a similar buyback?
A: The buyback is, all things being equal, good news. Yes, both TCS and Infosys have very strong balance sheets, surplus cash. So, one way of dealing with that is a cause for expansion or indeed if expansion needs satisfied then the surplus to that could come back to shareholders in form or other being either dividends or buyback. Therefore, we are broadly supportive of such action and there can be few other cases where that might be suitable. So if one starts inevitably, we might have others following suit. So we do welcome it.
Latha: What is your opinion of the founders versus board battle at Infosys? Does it give you any question marks on your investments in Infosys?
A: I think it has given question markets. Of course when one sees these things in the press then there is a bit of hype.
Latha: In this particular case the board held a press conference. The founders are speaking to the press?
A: Yes, everyone is speaking to the press and it is not particularly healthy in some sense. One prefers or would prefer that it will be far more agreement and consensus rather than disagreement and cross accusations although if there are issues then they should be dealt with a face on. So in the sense we are like everyone else, watching and waiting.
It is not good news when these things happen; the management time should be spent far more positively, working hard for the benefit of all shareholders.
Sonia: What about the market. Are you surprised with the kind of move that the Indian market made post the Budget and do you see more coming here?
A: I think we have been surprised by market since the Trump election in many ways and we are perennially surprised by market movement short-term, whenever what you predict or don't, world market have been pretty buoyant at the moment considering all the issues that we all know perfectly well, still remain out there. So yes, to an extent we are surprised but if the market have been fairly quiet with all the demonetisation effects coming through and in many ways we do not worry about things like that because from our investment style and process we are far more long-term and fundamental and we remain as keen on India as we were many years ago and our holdings very rarely change.
Anuj: What kind of returns do you expect from India now and in your portfolio you have highest overweight in IT even more than the financials, which is quite interesting. From here on what kind of sectors do you see outperforming in India?
A: It is very hard to be specific on what sectors are going to do better than others and certainly in terms of stock market returns the glory days, if you like, of the IT returns are probably over, so it is a far more mature industry now and that is already evident in the ratings on the stocks. Certainly the financials, we hope are fairly highly rated, the HDFC, HDFC Bank and the like are not particularly value stocks. So it is a matter for us of aligning growth prospects with valuations and being prepared to pay a bit more for the growth that we think is coming through a bit stronger in those sectors.
In any given year the market can be down 20 or 30 percent or up 20 or 30 percent. However, that's the way the market move but we are looking long-term earnings growth maybe a mix of sectors with varying growth rates but averaging something like 10-15 percent.
Latha: There is another merger that is entirely a rumour at this point in time. It's a stock you hold - Kotak Mahindra Bank. The talk is that it could be looking to merge with Axis Bank. How would you react as an investor?
A: We will react when we know the news. Yes, we are holders of Kotak Mahindra Bank. We have been admirers of the way it is run and the tightness with which it runs and it has made acquisitions in the past where we were holders of the company being acquired. We are not holders of Axis Bank. I think just wait and see, but Kotak is a very well managed company.
Sonia: The other thing that strikes me interesting is your addition of Bharti Infratel into your portfolio way back in October. Are you smiling through the pain that you are seeing in the telecom space now because it's a tough space to be in these days?
A: I agree it is a tough space and at times we wish we weren't in the telecom space. We have got small exposure in telecom but as part and parcel of running a portfolio we do balance the portfolio. We have a mix of good and bad performers and some industries are doing better than other at a time. So yes, smiling through the pain is quite a good way of describing it.