21 July 2013

"Damned if you do, damned if you don't" - this largely seems the story of big-ticket M&A in the Indian IT/BPO industry ::JPMorgan

 “Big-ticket” M&A in Indian IT ordinarily have several objectives, but
three are most often articulated: (1) introducing or raising growth profile in a
distinct, altogether new function (vertical/horizontal/geography), normally the
more immediate payoff; (2) cross-synergizing, which is selling the acquired
capability into the broader base of the acquirer’s existing clients and the
acquiring firm’s existing capabilities into new clients from the acquisition to
boost the acquirer’s organic growth prospects; and (3) achieving sufficient,
scalable offshore flow-through (or downstream) over time to scale and break
even on margins (this applies to acquisitions made onsite). Items 2 and 3 are
typically longer-term aims, much harder to realize, as well, as they entail
integration of the target into the acquirer’s mainstream. This has proved a
torturous agenda, as integration can easily undermine the culture,
processes and identity of a target, which defeats the logic of the acquisition.
 We find that most, if not all, large M&A fails at Items 2 and/or 3. Highprofile acquisitions that have delivered significantly below expectations, in our
view, include Info-crossing (acquired by Wipro in Aug-07 for US$600mn),
Oracle’s acquisition of i-Flex (stock price of Oracle Financial Services
motivated more by technical factors such as delisting) and, to a lesser extent,
Axon (acquired by HCLT for US$658mn in Dec-08). Info-crossing has not
consolidated Wipro’s then-leadership in infra-management (if anything,
TCS/HCLT has taken over leadership in infra-management in the last two
years). The financial products business at OFSS has been languishing for a
while now, growing at just single digits in percentage terms. AXON has not
helped HCLT grow enterprise solutions (SAP/Oracle solutions) ahead of peers,
though AXON has helped HCLT sell its core infra-management services to its
(AXON’s) clients.
 In an attempt to preserve the distinctiveness of the target and also as part of
learning from the shortcomings of previous M&A integration efforts, many
acquirers are delaying the integration of targets into the mainstream, which we
see as prudent. This might postpone the synergy gains, but if doing so minimizes
risk of the M&A going wrong, it might be well worth it.
 Historically, the market has been initially skeptical of larger mergers of
listed entities, especially mergers involving a company merging into a
smaller/comparably sized one (e.g., Patni-iGate or Tech MahindraSatyam). We find that it can be 12-18 months after a merger announcement
that tangible value emerges (if it happens) for the investor, as the acquirer
sets about tackling the initial burden-of-proof (we have seen this with the
TechMahindra-Satyam merger, for instance). Investor interest in stocks of
companies involved in a merger emerges only at very reasonable valuations,
when merger/acquisitions risks are more than adequately priced in. Such a point
may be reached after a period of significant stock underperformance following
the merger announcement.
 We would temper buoyant expectations of significant acquisition(s) or
merger(s). The feel-good factor that the prospect of a large acquisition
sometimes induces may be more psychological and may not square with the
subsequent track record, as our analysis suggests

When easy money ends:: Credit Suisse

■ RBI in an attempt to protect the INR announces a reversal in its easy
money stance. In a surprise move, RBI has announced a 200 bp hike in bank
rate to 10.25%, sucking out Rs120 bn of liquidity through OMOs. It has capped
banks’ borrowing under the LAF (repo window at 7.25%) to Rs750 bn, and for
any incremental liquidity, banks will have to source funding at the now elevated
bank rate of 10.25%. The measures are aimed at drying up excess INR liquidity
in an attempt to reverse the slide in the currency.
■ Banks’ asset growth had outpaced deposit growth. Comforted by the
Central Bank’s easy money stance, Indian banks’ loan growth was consistently
running ahead of deposit growth for the past three years. Loan deposit ratios
were therefore consistently rising; at 76%, LDRs are close to historic high (India
has 27% reserve ratio). ALM mismatches at some of the banks had also
aggravated over the past few years, as loan book tenures had been rising.
■ Downgrade high valuation, wholesale funded banks. These wholesalefunded entities (Yes, Kotak, BOI, Canara and the NBFCs), banks with high
LDRs (IndusInd, Yes) and those with ALM mismatches will be the worst
impacted with these moves, as they will be forced to curb asset growth in
addition to facing margin pressures. Indian banks’ valuations till now were
primarily determined by asset side comfort. With the liability part of the balance
sheet also coming into focus, we see downside to stocks of wholesale funded
retail lenders like Kotak (95% LDR) and IndusInd (82%) trading at ~3x book,
and we downgrade these two to UNDERPERFORM from Neutral (Lower TPs
to Rs618 from Rs680 and to Rs416 from Rs465, respectively). The biggest risk
from this set of measures would be if the lack of liquidity precipitates the
corporate asset quality problems. As liquidity becomes scarce, some of these
assets may turn to NPLs on books quicker than expected earlier. We maintain
our UNDERWEIGHT stance on the Indian banks sector

Technicals: Essel Propack, Bajaj Electricals, BHEL, Ashok Leyland, Glenmark, ITC : Business Line


CLSA Greed & Fear - Loose cannons

CLSA Greed & Fear - Loose cannons 18-07-2013

·         Markets will doubtless continue to trade on every comment coming out of Fed governors and on every US data point. GREED & fearcontinues to believe there will be more of a normalisation scare over the American and European summer.
·         The potential for market nervousness has been further increased by press reports last week that former Treasury Secretary Lawrence Summers is lobbying hard to replace Billyboy Ben when his term expires on 31 January. The lack of certainty over who will replace Bernanke has created added uncertainty to increase the already significant neurosis over “tapering off”.
·         Many are arguing that the neurosis over “tapering off” is overdone even if tapering begins. First, the Fed will only be reducing the amount of securities it buys, not liquidating existing holdings. Second, the whole process will be done extremely incrementally.
·         Still in GREED & fear’s view the market reaction to the first hint of tapering highlights the potential for market dislocation from any attempt to exit though the fallout is likely to be much greater in the emerging market debt space than in, say, US equities. The outstanding amount of emerging market debt issuance has grown considerably in recent years.
·         As for the timing of any theoretical rate hike, Bernanke’s testimony before Congress on Wednesday confirmed that the Fed will net out any effect on the employment data stemming from Americans leaving the workforce.
·         If the prospect of “tapering off” and a resulting stronger US dollar represents one continuing threat to Asia and emerging markets, slowing China growth is obviously another. The latest data from China indicates continuing slowing growth if not a collapse with the slowing trend extending to the all-important credit data.
·         The comment by Chinese Finance Minister Lou Jiwei last week that a real GDP growth rate of 6.5% was now acceptable is a sign that the new China leadership is more focused on real restructuring than its predecessor. Still the pressure to ease up from the various vested interests will be immense so GREED & fear will take nothing for granted in terms of a potential move back to stimulus.
·         Pressure to ease in China will grow, via a cut in the reserve requirement ratio, if capital continues to flow out. China certainly has the room to cut the reserve requirement ratio.
·         There is a growing argument for a depreciation of the renminbi given the substantial appreciation of the real effective exchange rate in recent years. A managed depreciation has certainly become a distinct possibility, even if China has not yet reached the stage where it would be prepared to announce a one-off large depreciation of the currency as happened in early 1994, a move which would certainly put pressure on Asean.
·         There is growing noise about the new China leadership moving faster to liberalise the capital account. If this is really the case, andGREED & fear is highly sceptical because of the control-freak instincts of the PRC leadership, then it would be very risky. This is because it is dangerous to deregulate fully and open a capital account when there is a pre-existing problem in a banking system. GREED & fear’s base case is that further opening moves will be very limited. 


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RBI Action – Setting Stage for Next Leg Down :: Morgan Stanley Research

RBI increased interest rates on MSF by 200 bps;
announced sale of Rs. 120 bn of G-Sec under OMO
and capped liquidity under LAF at 1% of NDTL. This
should tighten liquidity and take market interest
rates up. With economic growth refusing to pick up,
higher rates will be negative for banks.
Our In-Line view on the sector was premised on
stabilizing growth and rates…both are at risk now.
Recent data on growth have been negative (for instance
IP decline of 1.6% in May was against consensus
expectations of +1.6%). Continued sluggishness in
growth increases stress on banks by impacting volume
growth and increasing asset quality risk.
Liquidity was holding up fairly well helped by
slower loan growth – This had kept market rates in
check. With inflation coming off, we expected interest
rates to decline, albeit marginally. Hence, while growth
was faltering, some of the pressure was likely to be
abated by lower rates. RBI action focuses on reducing
liquidity and thereby pushing up rates.
Asset quality can continue to surprise negatively –
Our view was that in F14, impaired loan formation will
stay at high levels compared to history but will reduce
vis-à-vis last year’s levels. However, given weakening
macro, we can see more corporates under pressure.
Hence, our assumption of NPL formation of 2.2% of
loans in F14 (3.2% in F13) and 1.9% of restructured
loans (2.9% in F14) has upside risk.
Avoid weak balance sheets – We like strong liability
franchises with good asset quality i.e. HDFC Bank. SOE
banks will continue to hurt and NBFC’s will face higher
funding costs. Our top avoids are SBI, PNB and Axis

Index Outlook: Turbulence on the cards: Business Line


21 July : Pivotals: Reliance Ind, SBI, Infosys, Tata Steel :Business Line


RBI unnerves bond market :Business Line

The Reserve Bank of India came out with a slew of measures on Monday to curb rupee volatility. The intent was clear – to mop up excess liquidity used by banks to take a speculative position in the forward exchange markets. However, the measures seen as a trigger to hike short-term interest rates resulted in one of the highest single-day outflows on Tuesday since October 2008, from various fixed income mutual funds.
In its first measure, the central bank capped the amount that banks can borrow from overnight markets to Rs 75,000 crore. This is essentially the borrowings banks make through the liquidity adjustment facility (LAF). Second, the RBI increased banks’ cost of borrowing short-term money through the marginal standing facility (MSF) by 200 basis points to 10.25 per cent. Currently, banks can borrow funds overnight through the MSF at 8.25 per cent.

LIQUIDITY CRUNCH

This sets the stage for a rise in short-term borrowing rates which will impact the cost of funds for banks. But will banks really need to borrow at the higher rate of 10.25 per cent? As long as banks borrow large amounts of money under the LAF window, they will not be able to lower deposit rates and hence lending rates. Even as the amount borrowed under LAF moderated in June and July, RBI’s third measure to suck out liquidity by selling government securities may create a liquidity deficit once again.
The RBI announced the sale of government securities to the tune of Rs 12,000 crore on July 18 on top of the Rs 15,000-crore sale already announced. Thus, to maintain their margins, banks may end up raising their base rates, to which all lending rates are benchmarked.

WHY THE REACTION

Bond prices have an inverse relationship with interest rates. As interest rates go up, existing bonds become less attractive and hence investors are willing to pay less for them. With expectations of interest rates going up in the short term, the yields (ratio of interest to price of bonds) shot up by 50 basis points in a single day.
This triggered panic in the debt market. Investors, mostly banks and companies, pulled money out of liquid schemes, in which they park idle funds. Liquid schemes invest in money market instruments, short-term corporate deposits and bonds with maturity of three to six months. RBI created a temporary liquidity window to allow banks to borrow Rs 25,000 crore at 10.25 per cent. This was to enable banks to meet the liquidity requirement of mutual funds, which faced huge redemption pressure.
Yields on the 10-year gilts which had plunged sharply to 7.1 per cent in May on expectations of rate cut reversed course significantly last week and now hover around 8 per cent.

‘We will continue to grow above industry average’ HDFC Bank :Business Line

Our diversified loan book will help overcome weakness in any particular segment.
The banking sector is fighting slowing loan and deposit growth and risks to asset quality. Notwithstanding such challenges, HDFC Bank continues to outpace industry growth rates, delivering strong loan growth of 21 per cent even in the quarter ending June . Stable margins and very low delinquency have justified its premium valuation in the past.
Paresh Sukthankar, Executive Director, HDFC Bank, shared with Radhika Merwin his views on the bank’s prospects in the current challenging environment.
Excerpts from the interview:
What policy action do you expect from the RBI now?
Given the liquidity tightening measures introduced by the RBI, I do not expect any further policy action right now. As long as there is an overbearing focus on curbing currency volatility, it will not be meaningful to predict the direction of the monetary policy.
The repo rate has been cut by 125 basis points in the last one year, and it has not yet been passed on to borrowers in the form of lower lending rates.
As long as banks continue to borrow sizeable amounts in the overnight window under the liquidity adjustment facility (LAF), they will not be comfortable to lower deposit rates. Under the base rate mechanism, lending rates can come down only if deposit rates are cut, which is linked to liquidity.
The question really is whether there is comfortable liquidity with banks to lower deposit rates.
As deposit mobilisation is already low, banks are reluctant to lower the deposit rates.
On the other hand, loan growth remains subdued and hence, while deposit growth is not constraining growth, it is preventing a meaningful cut in deposit as well as lending rates.
So, are we still in a declining interest rate scenario?
Given the steep fall in the rupee, it was difficult to expect any sizeable policy action from the central bank.
However, until a week back, my expectation was some easing of liquidity and lower rates over the next couple of quarters.
Now, until the exchange rate stabilises and these latest measures are reversed or eased, liquidity is at a premium and there is a clear short-term bias towards higher rates.

Birla Sun Life MIP II - Savings 5: Invest :: Business Line