No Plastic Surgery, Act Your Age: Aswath Damodaran On Infosys

Global markets are entering a period of higher inflation and return of volatility, said Aswath Damodaran, professor of finance at the NYU Stern School of Business.

This will be a shift from the last decade, which was dominated by a risk-free rate and low growth combination. “These are all healthy signs,” said Damodaran, who is known for his work on valuing companies and understanding stock investments.

The rise in interest rates in the west does not necessarily mean bad news for emerging market investors as Damodaran points out it is followed by growth which in turn help valuations.

“We overestimate the impact the Fed has on rates.”

On Indian IT

India’s information technology companies need to adapt in order to grow, as they reach a level of maturity in the market, said Damodaran

“Indian IT companies are not dying, but ageing”, and companies like Infosys Ltd. need to come to terms with that, Damodaran told BloombergQuint, adding that only some companies will be able to adapt to the changes.

Damodaran’s views seem to resonate with Infosys’ new CEO Salil Parekh who recently said the company urgently needs to make investments into new technology such as the Internet of Things and employee re-skilling to stay relevant to its clients.

The rest of India’s IT companies, which are yet to reveal their results, are expected to grow at steady rates. The sector itself has outperformed the overall market at 31.87 percent, compared with India’s benchmark Nifty 50 Index’s 15.85 percent over the last 12 months.

Also Read: How Investors Can Manage India’s 2019 Election Risk

Q. How do you think investors over the world are valuing the markets today? The markets seem over-valued but everyone also seems to think this is the best time for earnings growth across the globe, given the GDP is doing what it’s doing.

  • Last decade was dominated by risk free-rate and low growth combination
  • Believe we are entering a period of marginally higher inflation and return of volatility

Q. You once said that interest rates moving up will not necessarily have an impact the way investors thing they would. Can you explain that?

  • Interest rates being bad for equity valuations is not a given
  • Earnings growth pick up will drive value even if rates increase

Q. You also believe that in effect the Fed is following the market, not leading the market.

  • Fed’s power comes from the perception that it has power
  • Investors over-estimate the impact the Fed has on rates

Q. Indian has had some very good and some very poor stories as well. How do you value poor stories, especially the banks?

  • Business stories don’t always have happy endings
  • Fear investors don’t know the full story in Indian banks
  • Indian investors have seen breach of faith from banks, similar to global banks in 2008
  • Buying an Indian bank only because of high dividend yield is a dangerous thing

Q. In India, there is a promise with the consumption theme. What is at play here?

  • Indian consumption stock investments suffer from the big market delusion

Q. A lot of people now seem to be skeptical of the FANG stocks.

  • FANG stocks became FANG stocks because they were so successful
  • FANG stocks have found a way to keep growing, even as they grew bigger
  • Facebook and Google have expanded the size of online advertising
  • Common features of FANG companies are uncommon amongst other companies

Q. How would you change your valuation method for these kind of companies which are trading at a premium to a valuation that was anyway expensive?

  • Not looking to shift valuation methods for expensive companies, just adjusting
  • Essence of value investing is buying a co at a price lower than its value
  • Believe low PE buying is a very lazy way of valuation

Q. If there are companies which have been expensive but are growing, would you be comfortable assigning a premium valuation to them which can stay for a while?

  • Believe sporadic instances of extremely high valuations isn’t abnormal

Q. You’ve put out a valuation piece on Netflix in the last 18 hours. Tell us more about it.

  • Netflix has managed to play the expectations game the way it wants to
  • Winning the game in market should be accompanied by things which help company’s financial

Q. Some companies used to trade at 40-45 times PE but have been trading at 55 times PE now.The market does not bat an eyelid before them valuations. Do you think it’s the valuation story effect?

  • Way you tell a story plays a telling role in company’s valuations
  • Momentum effect playing out in companies like Britannia
  • Britannia story seems to be reaching the end of its glory phase
  • Refining the existing story is the only way Britannia can enhance value

Q. How would you value regional contenders to the likes of Netflix? Is it a futile fight?

  • Not futile fighting behemoths like Netflix and Amazon if strategy is differentiated
  • Cos need to create a niche while fighting behemoths like Amazon
  • Head to head, Amazon would have outlasted Flipkart
  • Walmart acquisition of Flipkart would help it combat Amazon
  • Takeover candidates in highly regulated sectors will attract big premiums

Q. You have been saying that Indian IT companies are ageing or dying.

  • Indian IT companies aren’t dying, but aging
  • Firms like Infosys need to learn to live with reality of being a mature company
  • Trying to go back to being growth company can result in problems for Infosys

Podcast: World’s Foremost Expert Explains How To Value A Stock

Watch the full conversation here.

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