An insider's view on emerging markets

I recommend this interview of indian private equity fund manager, Mr. Partha Gandhi, managing director of Vision Investments, published today by The Economic Times. Here are some excerpts from this interview. Mr. Gandhi conforts our long secular view on emerging equities while aknowledging that there could be still a lot of volatility and downside pressure in the next 6 to 12 months.

With the liquidity crunch accelerating, how do you map the emerging market universe in the next 3-6 months?

If there is a slowdown in the US, you are going to see a fallout across every major country in the world. If you go back and look at some of the financial crises that you have had over the past century, there are quite a few. If you start mapping these out, this is one of the worst we have seen in a long, long time. In the emerging market universe, markets like India, Brazil or China are showing signs of decline. Markets are typically going to look to future and based on that, there will be issues. ICICI Bank is a case in point.

They have issued a statement saying they have not been affected in a big way, and I tend to agree. You will find that Indian banks have some exposure, but not tremendous exposure. We are looking at tough times ahead, at least for the next 6 months.

I believe that the entire emerging market sector, whether China or India, is going to start looking better around June next year. By which time, you will see more clarity, more visibility in the market. What I would look for in emerging markets is equities, where one can find quality through strong fundamentals and good cash flow.

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What is your sense of where the Indian market is headed and how do we compare vis-à-vis other emerging markets now?

Indian markets have been hit by the recent global shakeout, but not as badly as others. That’s primarily because we have a strong domestic internal market. We are looking at global pressure, but the internal consumption story is very strong.

If you look at liquidity, we have a relatively well-regulated banking environment. In fact, it is the regulatory environment that has served as a cushion for India. We could have been completely open and in a lot more trouble.

That said, hedge funds have a lot of performance pressure compared to, say, private equity funds which can afford to take a 5-year view. So, short-term performance is a tough call right now.

The battle for AXON and its implications for the Indian I.T. sector

As Ramit GUHA writes in the WSJ, the battle is raging between Indian firms INFOSYS (BOM:500209) and HCL (BOM:532281) for the takeover of AXON Group (LON:AXO), a British I.T. software company with strong value-added SAP implementation capabilities and with a foothold in the UK and in continental Europe.

This battle epitomizes the new creed among indian I.T. outsourcing companies as they try to diversify their clients base away from the ailing US market (that still represents 60% of their overseas turnover with the bulk in financial services), and as they seek to move up the value scale, away from low margin outsourcing into high margin I.T.consulting services.

So far, indian outsourcing companies like INFOSYS, WIPRO, TCL, and HCL have done relatively well both in terms of revenue generation and margin expansion, with INFOSYS being unchallenged as the industry leader both in terms of revenue growth and profitability.

But the financial meltdown in the United States is forcing Indian outsourcing companies to reinvent themselves if they want to survive. As a matter of fact, wage inflation in India has reached double digit levels this year putting a strong pressure on costs amid a shortage of skilled labour, and international competition has increased in the low end of the business from сountries such as Vietnam, Ukraine, and the Philippines.

If as we expect, the cash-rich INFOSYS succeeds in this takover battle over AXON, it will strenghten its revenue generation potential and preserve its advantage over its local and international competitors. However, it will take more time and more substantial acquisitions for INFOSYS to compete with global consulting giants such as IBM and ACCENTURE.

In this regard, the dismissed rumour that had been circulating a year ago about a potential acquisition of Paris-based CAPGEMINI, a heavyweight in the European I.T. consulting industry with a workforce of 75000 equivalent in number to that of INFOSYS, looked much more like the perfect strategic move for the Indian company ! But at that time CAPGEMINI was probably considered "too big to swallow" by the Bangalore-based conservative management. Watch out for further developments this year !

Alex Kateb

This article was also published on Seeking Alpha, the leading provider of stock market opinion and analysis, at the following URL http://seekingalpha.com/article/98193-implications-of-the-battle-for-axon-for-the-indian-it-sector