Source | The Economic Times
Talking to ET Now’s Tanvir Gill , Aswath Damodaran , Professor-Finance, NYU , says TCS and Infosys are not declining yet but they are closer to the decline phase of their lifecycle. People have to be realists when they invest in these companies.
Edited excerpts: What is your view on Indian global brands? Let us take the Royal Enfield story. It is a fascinating story because it was a motorcycle that was essentially Indian. It was basically a low-cost domestic story. I am not even going to talk about the price. It is amazing how the company, the Royal Enfield has been able to adapt and change its story and expand into a global brand. It is possible that the pricing has got out of hand. But I call these, runaway stories. Some time when a story sounds so good, you sometimes can file into the story without wanting to ask questions. The questions that need to be asked is what kind of margins can Royal Enfield which is now a global brand name make in the global market place? And that is when reality starts to intrude in that story. But I love the Royal Enfield story. In the next version of the book, I will simply like to show how you can change stories over time, how a purely domestic mass market company rebranded itself and told a new story about itself as a global brand name company. It will be interesting to see how much play they can get out of it but it is something I am going to watch for a while because I find it fascinating. I also thought why not look at two interesting models from the banking space — the largecap private banking segment particularly — which has drawn a lot of foreign institutional investors. Let us look at ICICI Bank versus HDFC Bank, one a ranked outperformer, the other a ranked underperformer. Goldman Sachs has just called for a $100 billion dollar market cap by FY20 for HDFC Bank. Price to book on a future basis at four times is pretty much at the peak of the valuation cycle. There has been a long due call for ICICI Bank to rerate from the current valuation levels which are about 1.5 times price to book. How do you compare the two stories and where do you see more potential? With almost any Indian banks/financial service company, in the background there is always a question of when are these markets going to open up and what is going to happen to these? These companies right now have big markets that are protected from outside competition. But considering the extent that these markets are going to open up sooner rather than later, the question is who is in better position to deal with that foreign competition? Foreign competition is going to come in big time with people throwing money into India and what the market seems to be saying is HDFC is in a much better position to fight off that foreign competition because of the segment of the market that it serves than ICICI. I am not sure how much base is to that story but that seems to be the story that is driving these valuations. It will be interesting to see how housing finance plays out in India and how that market actually works through time because that is going to be a market where how India opens up the financial services segment of the economy and what will drive the valuation of these companies. So with any of these investments, you are making a joint bet on the company as well as how you see reforms playing out in the particular sector. If one was seeking value bias in this market, then ICICI Bank to my mind at 1.5 times book would be more compelling. Let me put it this way. As an investor, I would rather have ICICI in my portfolio than HDFC. So, as an investor. it is a no contest to me. I would rather have 1.5 times book value and take my bets on ICICI being able to deal with the competition than a four times book value company. But I am making a bet that the segment of the market they are in is protected enough from competition that they can deliver 10%, 12%, 14% returns because that is what four times book value translates into. As an investor, it is an easy pick for me. ICICI is a better investment. If you ask me which one is the better company, that is a different question, and I think that is an interesting question investors need to ask themselves. There are lots of great companies in India that are bad investments and there are lots of bad companies in India that could be great investments because it all depends on the price you are getting in and for me ICICI looks like a better investment right now even though it might not be as lucrative a company in terms of its comparative advantages and the expected return on equity.