banner

Big News


Posted on 13-Jan-2017 Comments  0

Big Shift at TCS


What are the challenges ahead of Rajesh Gopinathan?


On a day when TCS announced a stable growth of 1.5% in revenues and 2.9%in profits, the attention was occupied by a different subject altogether. On the same day, the company made two major changes. The current TCS CEO moves on to take charges as the Chairman Tata Sons.Chandra will be replaced by CFO, Rajesh Gopinathan, who takes over as the next CEO of TCS. What are the big challenges for Rajesh as he steps into Chandra’s shoes?


Living in the post-Trump era…


Chandra is, probably, exiting TCS at a time when the level of uncertainty in the short term is the highest. H1-B visa costs are likely to go ups harply and if Trump has his way then minimum wages for Indian onsite workers may have to be increased. Trump is keen to do away with the cost arbitrage that countries like India have enjoyed over the US in the department of costs. Then there is the additional threat of apenal tax on outsourcing. That basically means that US companies that hive off key jobs to India will have to pay a border tax in the US.At least, Trump has promised to make the border tax steep enough to dissuade outsourcing. If any of these threats are even partially implemented, then Indian IT companies are going to have a tough time.Rajesh will have to live with the immediate uncertainty of a Trump revenge series. For a large player like TCS, it could have significant implications for revenues.


Next phase of Indian IT…


Rajesh Gopinathan may have to preside over the next big phase of Indian IT.The good news is that companies like TCS have already shifted nearly 17% of their revenue base to the digital space. That makes the business less vulnerable compared to other BFSI and telecom players.However, moves like higher visa fees and higher cost of on-shoring are not good news for the core business model of TCS. The next phase also implies that TCS will have to gradually move beyond client execution and move towards IP creation. That is what has differentiated US software companies and that will be the major challenge for TCS. The shift needs to start now!


How will a CFO fit in?


If you look at the previous CEOs of TCS, they have predominantly come from engineering and operations background. Each of his predecessors;be it F C Kohli, Ramadorai or Chandra have left a deep and enduring imprint on the model of TCS. Rajesh surely has big shoes to fill.With his predominantly finance background, whether Rajesh can envisage and handle the challenges at a critical phase of Indian IT remains to be seen. If the immediately reaction of institutional investors and the markets is anything, there is a certain degree of skepticism. Proving himself, against all these odds, will be the biggest challenge for Rajesh Gopinathan in 2017!


Strong Dollar


Why global markets need to be cautious…


Global bond guru, Mohammed El Erian, has warned the world markets about the perils of a strong dollar. As the world is coming to believe that a strong dollar could be a big benefit, Erian’s views are of tremendous value. Here are the 3 reasons why Mohammed El Erian is extremely wary of a strong US Dollar…


What it means for US equities…


Contrary to what many would like to believe, a strong dollar is not always favorable for US equities. Most of the top US companies derive a chunk of their revenues and profits operating out of other countries,especially emerging markets. Now, just as a weak currency benefits exports and foreign operations, a strong currency is negative for exports and foreign operations. Take the case of Cisco which sells routers in Turkey. Now Cisco operations in Turkey will earn in Turkish Lira. But since the dollar is getting stronger, each Turkish Lira earned by Cisco will effectively earn lesser dollars when the money is brought back to the US. This is one of the reasons many technology driven companies in the US have been showing tepid growth.A stronger dollar works against their non-dollar earnings. Weak global earnings are not great news for the US which is increasingly depending on growth in demand from emerging economies to boost its sales and revenues. Very soon, this will translate into value destruction in equities as well as the market cap of the Dow Index.


Probably,a currency war…


There is a certain ominous tinge to the term, “Currency War”. But that is what it could eventually boil down to. As the dollar gets stronger, China will be forced to devalue the Yuan. That will trigger off a domino effect across EMs as China is already the largest trading partner for most of the EMs. As the Yuan gets weaker, other EMs will be forced to cut the value of their currencies. A currency war is also knows as a process of competitive devaluation. Countries compete with each other in making their currency cheaper with the hope of boosting exports. In the event, it only debases the currency and imports inflation from stronger currencies.


The big dollar debt burden…


Global private debt denominated in US dollars is to the tune of $9 trillion.Any strengthening of the US$ results in substantial losses for these debt issuers in terms of servicing and repayment capacity. In the last year alone the world has added nearly ½ trillion worth of US dollar denominated debt. That will be the big concern for global markets. A sustained strengthening of the dollar will mean that many corporations across emerging markets could suddenly find themselves on the brink of bankruptcy. According to basic estimates, a large chunk of this debt is un-hedged. It is anybody’s guess what the cascading effect could be as dollar strengthens!


Trump disappoints


Too much constriction, too little reforms…


The much-touted Trump press conference was a classic case of “much ado about nothing”. There were expectations on some announcements pertaining to taxes and infrastructure spending. The speech dwelt alot more on Russia, the media and said very little about there formist noises that markets actually wanted to hear. On the other hand, Trump disappointed by being harsh on the pharma sector and on US companies outsourcing their activities to lesser-cost destinations in emerging markets. Here are the take-aways…


What about reforms?


It would not be inappropriate to say that Trump had actually raised the hopes of markets. With his focus on cutting taxes and infrastructure,the market expected some great opening comments. The speech was bereft of any such reformist noises. Tax cuts in the US were important because it means that the spending power goes up and translates into higher demand from the US. Infrastructure spending was likely to have a multiplier effect on growth. The combination of lower taxes and higher infrastructure spending was expected to create a virtuous circle of higher inflation, higher spending and higher growth in the US. The speech did not make any mention of them. The impact was obvious as equities corrected, the dollar weakened and safe haven gold was again attracting demand. Looks like Trump failed to make a reformist dent!


Watchout, companies…


The Trump speech was almost a warning for 3 key sectors with larger global ramifications. Firstly, Trump is likely to penalize pharma companies for overpricing drugs. This could open a Pandora’s Box.It will be negative for Indian generic makers, who have also been accused of price fixing. Secondly, Trump plans to impose a Border Taxon US companies that outsource to other countries. This is a kind of penalty for shifting jobs out of the US. What Trump needs to realize is that such decisions are best determined by “Economics”! If Apple can produce a world-class I-Phone in China at a fraction of the cost, then what is wrong? Lastly, defense spending could come under the scanner with costs being re-examined. That is bad news for countries and companies counting on Trump for outsourcing US defense manufacturing orders.


Speech was low on transparency…


The speech was also very low on transparency. Trump has refused to make his tax returns public, something previous US presidents have done.Secondly, even as US president, Trump will continue to hold on to his business interests, he will only transfer the management to his sons.That is a huge conflict of interest. In a nutshell, the Trump speech was largely insipid at a time when the world was expecting some bold reformist initiatives! 

Click here to know about Market Capsule

user

Comment

Copyrights @ 2015 © Navia Commodities Broker Pvt Ltd. All Right Reserved
Developed and content provided by  C-MOTS Infotech