By Anto Antony - May 18, 2012
State Bank of India Ltd., the nation’s largest lender, gained the most in more than two months after posting a record profit in the fourth quarter, beating analysts’ estimates.
Net income climbed to 40.5 billion rupees ($738 million), or 63.76 rupees a share, for the three months ended March 31, from 208.8 million rupees, or 0.33 rupees, a year earlier, the Mumbai-based bank said in a statement to the exchanges today. That compares with the 35.3 billion-rupee median of estimates compiled by Bloomberg.
State Bank’s risk buffers widened in the quarter, following a 79 billion-rupee capital infusion by the government, while its bad-debt ratio narrowed from December levels. The profit increase was driven by a gain in loan income and a drop in funds set aside for defaults. Policy makers are further easing a credit squeeze by cutting banks’ reserve requirements.
“With a capital buffer above the government target and reduction in bad loans, the lender seems to be getting back on the growth track,” said Dolly Parmar, a banking analyst at Mumbai-based brokerage IFCI Financial Services Ltd. “The bank will be in a position to grow aggressively if the government sticks to its promise of further capital infusion this year.”
The injection of funds by the government, State Bank’s biggest shareholder, ended a two-year wait and allowed the lender to meet tighter global rules and replenish capital depleted by provisions against bad loans. The bank’s capital adequacy ratio under the so-called Basel II norms widened to 13.86 percent in the quarter from 11.98 percent last year, it said today.
Shares Gain
The lender gained 5 percent, the most since Feb. 28, to 1,940.55 rupees in Mumbai trading today. The stock rose 29 percent last quarter for its best performance since the three months ended September 2010, and surpassed the 13 percent gain in the benchmark BSE India Sensitive Index during the period.
Net interest income, or revenue from lending minus payments on deposits, rose 44 percent to 116 billion rupees while non- interest income climbed 11.7 percent to 54 billion rupees, State Bank said. The net interest margin, a measure of lending profitability, widened to 3.9 percent from 3.1 percent a year ago.
Soured loans at State Bank fell to 4.4 percent of total credits in the quarter ended March 31, from 4.6 percent in the quarter ended December 31. The lender had reported a 99 percent decline in profit a year earlier as provisions for bad loans and pensions increased.
‘Declared War’
“We declared war on non-performing loans and it seems like we are winning,” Chairman Pratip Chaudhuri said in a televised press conference in Kolkata. “The fall in bad loans gives us the confidence that the quality of loans is well under control.”
Non-performing loans of state-run Indian banks climbed to 2.84 percent of total advances in the year ended March 31, from 2.35 percent in the prior year, junior finance minister Namo Narain Meena said on May 8.
Indian banks may need to raise as much as $50 billion to add to their retained earnings by 2018 to meet capital requirements at a time when their credit ratings are being squeezed by slowing economic growth and bad loans, Fitch Ratings said on May 4. State Bank will be the most affected by the higher requirements given its market share, Fitch senior director Ananda Bhoumik said in a statement at the time.
The government will infuse further capital into the state- owned lender to help it comply with capital norms, D.K Mittal, banking secretary at the finance ministry, said in an interview on March 21.
Wider Margin
The 205-year-old bank’s total outstanding loans increased by 15 percent to 8.68 trillion rupees at the end of March from 7.57 trillion rupees a year earlier. The net interest margin, a measure of lending profitability, widened to 3.9 percent from 3.1 percent in the year before.
The nation’s bank loans, excluding advances made to state agencies for food procurement, expanded by 19 percent as of March 30 from a year earlier, according to data compiled by the central bank.
Credit-default swaps on State Bank fell 37 basis points this year to 358 basis points yesterday, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value for the underlying debt should a company fail to adhere to its agreements.
To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net
To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Friday, May 18, 2012
Thursday, May 17, 2012
Rupee Tumbles to Record Low on Europe Debt Concern: Mumbai Mover
By Jeanette Rodrigues - May 18, 2012
India’s rupee fell to a record low as investors sought the perceived safety of the dollar over emerging-market assets on concern Europe’s debt crisis is worsening.
The local currency headed for the biggest weekly drop in almost six months after Greece’s credit rating was cut by Fitch Ratings yesterday amid concern the country will leave the euro. The Dollar Index, which tracks the currency against those of six major trading partners, rose 1.7 percent this week, the biggest advance since December, as Moody’s Investors Service downgraded 16 Spanish banks and 26 Italian lenders. Funds based abroad cut holdings of Indian shares by $114 million over May 15 and May 16, exchange data show.
“Strong market forces in favor of the dollar have created panic,” said J. Moses Harding, executive vice president at IndusInd Bank Ltd. (IIB) in Mumbai. “The Reserve Bank of India does not have enough ammunition to fight against the tsunami-like ferocious headwinds the rupee is facing.”
The rupee declined 2 percent this week to 54.7500 per dollar as of 9:28 a.m. in Mumbai, the biggest drop since the five days to Nov. 18, according to data compiled by Bloomberg. It slid 0.5 percent today and touched an all-time low of 54.7650 earlier. The currency has slumped 7.1 percent this quarter in Asia’s worst performance.
The rupee’s one-month implied volatility, a measure of exchange-rate swings used to price options, rose 92 basis points, or 0.92 percentage point, to this year’s high of 13.27 percent.
RBI May Act
The Reserve Bank is closely monitoring the rupee’s movement and will act if needed, Deputy Governor H.R. Khan told reporters at Pokhara in Nepal on May 16, without elaborating. The monetary authority is considering selling dollars directly to oil importers to ease demand for the greenback, a central bank official said, asking not to be identified, citing policy.
The RBI may offer dollars to oil companies at its daily reference rate for the local currency, B. Mukherjee, director of finance at Hindustan Petroleum Corp., India’s third-largest state-run oil refiner, said yesterday.
The central bank cut last week the amount of overseas income companies can hold in foreign currency to 50 percent from 100 percent, forcing them to convert earnings. On May 4, policy makers raised interest rates on non-rupee deposits by as much as 300 basis points and freed up borrowing costs on foreign- exchange loans to exporters.
‘Out of Bound’
“The pace and trajectory of the depreciation has resulted in the perception of a currency out of bound and beyond control,” Arvind Chari, senior fund manager in Mumbai at Quantum Mutual, wrote in a research report yesterday. “This we believe is not the case and the RBI can turn around the situation by initiating a few more policy steps.”
Six-month onshore currency forwards traded at 56.36 a dollar, compared with 56.21 yesterday, and offshore non- deliverable contracts were at 56.71 from 56.43. Forwards are agreements to buy or sell assets at a set price and date. Non- deliverable contracts are settled in dollars.
To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
India’s rupee fell to a record low as investors sought the perceived safety of the dollar over emerging-market assets on concern Europe’s debt crisis is worsening.
The local currency headed for the biggest weekly drop in almost six months after Greece’s credit rating was cut by Fitch Ratings yesterday amid concern the country will leave the euro. The Dollar Index, which tracks the currency against those of six major trading partners, rose 1.7 percent this week, the biggest advance since December, as Moody’s Investors Service downgraded 16 Spanish banks and 26 Italian lenders. Funds based abroad cut holdings of Indian shares by $114 million over May 15 and May 16, exchange data show.
“Strong market forces in favor of the dollar have created panic,” said J. Moses Harding, executive vice president at IndusInd Bank Ltd. (IIB) in Mumbai. “The Reserve Bank of India does not have enough ammunition to fight against the tsunami-like ferocious headwinds the rupee is facing.”
The rupee declined 2 percent this week to 54.7500 per dollar as of 9:28 a.m. in Mumbai, the biggest drop since the five days to Nov. 18, according to data compiled by Bloomberg. It slid 0.5 percent today and touched an all-time low of 54.7650 earlier. The currency has slumped 7.1 percent this quarter in Asia’s worst performance.
The rupee’s one-month implied volatility, a measure of exchange-rate swings used to price options, rose 92 basis points, or 0.92 percentage point, to this year’s high of 13.27 percent.
RBI May Act
The Reserve Bank is closely monitoring the rupee’s movement and will act if needed, Deputy Governor H.R. Khan told reporters at Pokhara in Nepal on May 16, without elaborating. The monetary authority is considering selling dollars directly to oil importers to ease demand for the greenback, a central bank official said, asking not to be identified, citing policy.
The RBI may offer dollars to oil companies at its daily reference rate for the local currency, B. Mukherjee, director of finance at Hindustan Petroleum Corp., India’s third-largest state-run oil refiner, said yesterday.
The central bank cut last week the amount of overseas income companies can hold in foreign currency to 50 percent from 100 percent, forcing them to convert earnings. On May 4, policy makers raised interest rates on non-rupee deposits by as much as 300 basis points and freed up borrowing costs on foreign- exchange loans to exporters.
‘Out of Bound’
“The pace and trajectory of the depreciation has resulted in the perception of a currency out of bound and beyond control,” Arvind Chari, senior fund manager in Mumbai at Quantum Mutual, wrote in a research report yesterday. “This we believe is not the case and the RBI can turn around the situation by initiating a few more policy steps.”
Six-month onshore currency forwards traded at 56.36 a dollar, compared with 56.21 yesterday, and offshore non- deliverable contracts were at 56.71 from 56.43. Forwards are agreements to buy or sell assets at a set price and date. Non- deliverable contracts are settled in dollars.
To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Wednesday, May 16, 2012
Microlender Sees Reprieve in New Law: Corporate India
By Anto Antony - May 16, 2012
SKS Microfinance Ltd. (SKSM), India’s largest publicly traded lender to the poor, says proposed legislation will spur a revival by easing loan recovery just as mounting losses force it to curtail operations.
The draft law would let microcredit companies improve debt collection and may also help raise funds, Chief Financial Officer S. Dilli Raj said in an interview. The Hyderabad-based lender’s loss last quarter widened almost fivefold, prompting it to cut jobs and shut branches. The stock is down 94 percent from a September 2010 peak.
SKS, backed by Sequoia Capital (SEQUX), forecasts relief from a bill approved by Prime Minister Manmohan Singh’s cabinet last week that would enable the Reserve Bank of India to regulate the industry. SKS has reported five consecutive quarters of losses after the southern state of Andhra Pradesh curtailed debt recovery, capped interest rates and waived loans to arrest a spate of suicides by farmers unable to make payments.
“The long-term clarity on the regulatory environment will have an immediate impact on the balance sheet,” Raj said. “We are confident of bridging the widening gulf between demand and supply” in small loans, he said.
The bill, if approved by parliament, will override provincial rules that differ from state to state and help improve the flow of credit to the poor and farmers left out by lenders including State Bank of India and ICICI Bank Ltd. (ICICIBC), the nation’s two biggest by assets.
Cap on Rates
The central bank, as the sole regulator, would cap interest rates and fees levied by microfinance companies under the new law, and also stipulate rules for debt collection. The Micro Finance Institutions (Development and Regulation) Bill will require all microlenders to register with the RBI, create a reserve fund from profits and audit their financial performance annually. In December, the RBI proposed an upper limit of 26 percent for annual interest rates on loans to individuals.
Prime Minister Singh, seeking to revive an economy expanding at the slowest pace in three years, is turning to microcredit companies to provide financing to the almost 43 percent of the nation’s 1.2 billion people who don’t have a bank account. Less than 5 percent of the country’s 600,000 villages have banks, data provided by the Reserve Bank show.
Non-urban consumers account for almost 8 percent of gross domestic product in India, where the World Bank says almost 70 percent of the population lives on less than $2 a day.
More than 70 people ended their lives in Andhra Pradesh between March 1, 2010, and Nov. 30, 2010, to escape coercive tactics used by microlenders in the state, according to data provided by the government-run Society for Elimination of Rural Poverty.
State Crackdown
The crackdown that ensued in the state left SKS saddled with losses after it failed to recover as much as 12 billion rupees ($221 million) of loans, or almost 24 percent of its total loans in the year ended December 2010, a filing to the exchanges shows.
“Any improvement in collection of loans from this state that accounts for as much as 40 percent of the loan book of the industry will improve the investor and banker sentiment toward the sector,” said Santosh Singh, a Mumbai-based financial services analyst at Espirito Santo Securities who has a buy rating on SKS. “If the Andhra loans were to be written off, many large microfinance companies will become insolvent.”
SKS plans to fire 1,200 employees, or 35 percent of its workforce, and shut down 78 of its 180 branches across the state, it said in a statement on May 10. The decision was announced two days after the lender reported a loss of 3.3 billion rupees for the three months ended March 31, compared with 698 million rupees a year earlier.
‘Painful Decision’
“Cutting down branches and reducing headcount are extremely painful decisions for us, but these have become urgent in view of the present financial situation,” Chief Executive Officer M.R. Rao said in the statement.
It’s far from certain that the measure will become law. Singh’s ruling coalition is dependent on the support of allies including Mamata Banerjee, who has stymied his efforts to allow foreign investment. Such opposition, for instance, forced Singh to scrap his cabinet’s decision in December to permit Wal-Mart Stores Inc. and Carrefour SA to open stores in the country.
“The Indian parliament has a history of rejecting many proposals already cleared by the cabinet,” said Nitin Kumar, a Mumbai-based banking analyst at Quant Broking Ltd. “We can only hope that this bill doesn’t face the same fate.”
The bill is scheduled to be introduced in the current session that ends on May 22.
Stock Slump
SKS started operating in 1998 as a non-governmental organization led by Vikram Akula, an Indian-American with a Ph.D. in political science from the University of Chicago. Modeled after Nobel Laureate Muhammad Yunus’s Grameen Bank in Bangladesh, the company raised 16.3 billion rupees in August 2010 by selling 16.8 million shares at 985 rupees each.
Sequoia, which backed LinkedIn Corp. and Google Inc., owns 6.84 percent of SKS, according to data compiled by Bloomberg.
The stock has slumped 92 percent since it was sold to investors for 985 rupees apiece in August 2010, and is headed for its worst month since November, when founder Akula quit his position as chairman after failing to revive earnings. It fell 4.5 percent to 81.70 rupees in Mumbai yesterday.
The lender and some of its unlisted rivals including Spandana Sphoorty Financial Ltd. are seeking to diversify into other financial services such as lending against gold to boost earnings. SKS said gold loans will account for 10 percent of its assets and as much as 25 percent of its profit in the coming quarters.
With a new law in place, SKS will focus on recovering written-off loans worth 12 billion rupees, CFO Raj said. As much as 85 percent of the lender’s total outstanding loans are outside the state of Andhra Pradesh now.
“My understanding is that the majority shareholders in the company and our creditors are happy about the new rule,” he said. “From here on we should be able to strengthen our position quarter after quarter.”
To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net
To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
SKS Microfinance Ltd. (SKSM), India’s largest publicly traded lender to the poor, says proposed legislation will spur a revival by easing loan recovery just as mounting losses force it to curtail operations.
The draft law would let microcredit companies improve debt collection and may also help raise funds, Chief Financial Officer S. Dilli Raj said in an interview. The Hyderabad-based lender’s loss last quarter widened almost fivefold, prompting it to cut jobs and shut branches. The stock is down 94 percent from a September 2010 peak.
SKS, backed by Sequoia Capital (SEQUX), forecasts relief from a bill approved by Prime Minister Manmohan Singh’s cabinet last week that would enable the Reserve Bank of India to regulate the industry. SKS has reported five consecutive quarters of losses after the southern state of Andhra Pradesh curtailed debt recovery, capped interest rates and waived loans to arrest a spate of suicides by farmers unable to make payments.
“The long-term clarity on the regulatory environment will have an immediate impact on the balance sheet,” Raj said. “We are confident of bridging the widening gulf between demand and supply” in small loans, he said.
The bill, if approved by parliament, will override provincial rules that differ from state to state and help improve the flow of credit to the poor and farmers left out by lenders including State Bank of India and ICICI Bank Ltd. (ICICIBC), the nation’s two biggest by assets.
Cap on Rates
The central bank, as the sole regulator, would cap interest rates and fees levied by microfinance companies under the new law, and also stipulate rules for debt collection. The Micro Finance Institutions (Development and Regulation) Bill will require all microlenders to register with the RBI, create a reserve fund from profits and audit their financial performance annually. In December, the RBI proposed an upper limit of 26 percent for annual interest rates on loans to individuals.
Prime Minister Singh, seeking to revive an economy expanding at the slowest pace in three years, is turning to microcredit companies to provide financing to the almost 43 percent of the nation’s 1.2 billion people who don’t have a bank account. Less than 5 percent of the country’s 600,000 villages have banks, data provided by the Reserve Bank show.
Non-urban consumers account for almost 8 percent of gross domestic product in India, where the World Bank says almost 70 percent of the population lives on less than $2 a day.
More than 70 people ended their lives in Andhra Pradesh between March 1, 2010, and Nov. 30, 2010, to escape coercive tactics used by microlenders in the state, according to data provided by the government-run Society for Elimination of Rural Poverty.
State Crackdown
The crackdown that ensued in the state left SKS saddled with losses after it failed to recover as much as 12 billion rupees ($221 million) of loans, or almost 24 percent of its total loans in the year ended December 2010, a filing to the exchanges shows.
“Any improvement in collection of loans from this state that accounts for as much as 40 percent of the loan book of the industry will improve the investor and banker sentiment toward the sector,” said Santosh Singh, a Mumbai-based financial services analyst at Espirito Santo Securities who has a buy rating on SKS. “If the Andhra loans were to be written off, many large microfinance companies will become insolvent.”
SKS plans to fire 1,200 employees, or 35 percent of its workforce, and shut down 78 of its 180 branches across the state, it said in a statement on May 10. The decision was announced two days after the lender reported a loss of 3.3 billion rupees for the three months ended March 31, compared with 698 million rupees a year earlier.
‘Painful Decision’
“Cutting down branches and reducing headcount are extremely painful decisions for us, but these have become urgent in view of the present financial situation,” Chief Executive Officer M.R. Rao said in the statement.
It’s far from certain that the measure will become law. Singh’s ruling coalition is dependent on the support of allies including Mamata Banerjee, who has stymied his efforts to allow foreign investment. Such opposition, for instance, forced Singh to scrap his cabinet’s decision in December to permit Wal-Mart Stores Inc. and Carrefour SA to open stores in the country.
“The Indian parliament has a history of rejecting many proposals already cleared by the cabinet,” said Nitin Kumar, a Mumbai-based banking analyst at Quant Broking Ltd. “We can only hope that this bill doesn’t face the same fate.”
The bill is scheduled to be introduced in the current session that ends on May 22.
Stock Slump
SKS started operating in 1998 as a non-governmental organization led by Vikram Akula, an Indian-American with a Ph.D. in political science from the University of Chicago. Modeled after Nobel Laureate Muhammad Yunus’s Grameen Bank in Bangladesh, the company raised 16.3 billion rupees in August 2010 by selling 16.8 million shares at 985 rupees each.
Sequoia, which backed LinkedIn Corp. and Google Inc., owns 6.84 percent of SKS, according to data compiled by Bloomberg.
The stock has slumped 92 percent since it was sold to investors for 985 rupees apiece in August 2010, and is headed for its worst month since November, when founder Akula quit his position as chairman after failing to revive earnings. It fell 4.5 percent to 81.70 rupees in Mumbai yesterday.
The lender and some of its unlisted rivals including Spandana Sphoorty Financial Ltd. are seeking to diversify into other financial services such as lending against gold to boost earnings. SKS said gold loans will account for 10 percent of its assets and as much as 25 percent of its profit in the coming quarters.
With a new law in place, SKS will focus on recovering written-off loans worth 12 billion rupees, CFO Raj said. As much as 85 percent of the lender’s total outstanding loans are outside the state of Andhra Pradesh now.
“My understanding is that the majority shareholders in the company and our creditors are happy about the new rule,” he said. “From here on we should be able to strengthen our position quarter after quarter.”
To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net
To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Tuesday, May 15, 2012
Bharti Said to Near Purchase of Qualcomm’s Indian Mobile License
By George Smith Alexander and Kartikay Mehrotra - May 15, 2012
Qualcomm Inc. (QCOM) is asking Bharti Airtel Ltd. (BHARTI), India’s largest mobile-phone operator, to pay about 50 billion rupees ($928 million) for its Indian unit as the two companies seek to conclude talks in the next two weeks, according to two people with knowledge of the matter.
Bharti may purchase the unit in installments over two years, the people said, declining to be identified as the details are private. Under the plan, Bharti would initially purchase a 26 percent stake in the unit, currently held by Tulip Telecom Ltd. (TTSL) and Global Holding Corp., and Qualcomm will own 51 percent of the division for at least two years after that, the people said.
Qualcomm, the biggest maker of mobile-phone chips, bought frequency licenses in cities including New Delhi and Mumbai in June 2010, paying 49.1 billion rupees for spectrum that allows handset users to download video at greater speeds. The San Diego, California-based company was allocated spectrum this month, two years after paying for the airwaves, people with knowledge of the matter said on May 8.
Mobile-phone operators in India including Bharti Airtel and Vodafone (VOD) Group Plc are trying to boost revenue by selling services such as video streaming as incomes rise. The number of smartphones sold in India almost doubled last year to 11 million, according to data compiled by Bloomberg.
Tulip Telecom and Global Holding paid 1.4 billion rupees each for their 13 percent stakes in Qualcomm’s Indian unit in 2010. Qualcomm owns the remaining 74 percent.
‘Major Partner’
Dimple Kapur, a spokeswoman for Qualcomm in Mumbai, didn’t immediately respond to an e-mail or phone call seeking comment on the sale. Spokesmen for Bharti Airtel and Global Holding declined to comment. The Economic Times reported last month that Bharti was in talks to buy Qualcomm’s new licenses, without naming its sources.
“Qualcomm as the major partner will take all decisions with respect to bringing in any operator partners,” Tulip Telecom Chairman Hardeep Singh Bedi said in a phone interview, without elaborating.
India penalized Qualcomm for delays in providing fourth- generation mobile services using the long-term evolution, or LTE, technology, by cutting the length of its licenses by 18 months, the people familiar with the matter said on May 8. Qualcomm Chief Executive Officer Paul Jacobs said in a letter to Telecom Minister Kapil Sibal dated April 16 that there was “no basis” for the penalty which Qualcomm estimated would cost it $90 million.
To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net
To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Qualcomm Inc. (QCOM) is asking Bharti Airtel Ltd. (BHARTI), India’s largest mobile-phone operator, to pay about 50 billion rupees ($928 million) for its Indian unit as the two companies seek to conclude talks in the next two weeks, according to two people with knowledge of the matter.
Bharti may purchase the unit in installments over two years, the people said, declining to be identified as the details are private. Under the plan, Bharti would initially purchase a 26 percent stake in the unit, currently held by Tulip Telecom Ltd. (TTSL) and Global Holding Corp., and Qualcomm will own 51 percent of the division for at least two years after that, the people said.
Qualcomm, the biggest maker of mobile-phone chips, bought frequency licenses in cities including New Delhi and Mumbai in June 2010, paying 49.1 billion rupees for spectrum that allows handset users to download video at greater speeds. The San Diego, California-based company was allocated spectrum this month, two years after paying for the airwaves, people with knowledge of the matter said on May 8.
Mobile-phone operators in India including Bharti Airtel and Vodafone (VOD) Group Plc are trying to boost revenue by selling services such as video streaming as incomes rise. The number of smartphones sold in India almost doubled last year to 11 million, according to data compiled by Bloomberg.
Tulip Telecom and Global Holding paid 1.4 billion rupees each for their 13 percent stakes in Qualcomm’s Indian unit in 2010. Qualcomm owns the remaining 74 percent.
‘Major Partner’
Dimple Kapur, a spokeswoman for Qualcomm in Mumbai, didn’t immediately respond to an e-mail or phone call seeking comment on the sale. Spokesmen for Bharti Airtel and Global Holding declined to comment. The Economic Times reported last month that Bharti was in talks to buy Qualcomm’s new licenses, without naming its sources.
“Qualcomm as the major partner will take all decisions with respect to bringing in any operator partners,” Tulip Telecom Chairman Hardeep Singh Bedi said in a phone interview, without elaborating.
India penalized Qualcomm for delays in providing fourth- generation mobile services using the long-term evolution, or LTE, technology, by cutting the length of its licenses by 18 months, the people familiar with the matter said on May 8. Qualcomm Chief Executive Officer Paul Jacobs said in a letter to Telecom Minister Kapil Sibal dated April 16 that there was “no basis” for the penalty which Qualcomm estimated would cost it $90 million.
To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net
To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Monday, May 14, 2012
Tata Steel Seen Gaining From New Quality Rules: Corporate India
By Abhishek Shanker and Rajesh Kumar Singh - May 14, 2012
Tata Steel Ltd. (TATA), Steel Authority of India Ltd. and JSW Steel Ltd. (JSTL) may increase their share of the $34 billion Indian market as new rules to upgrade product quality force smaller rivals to shut factories.
The Bureau of Indian Standards will introduce norms in September to improve steel used in buildings, bridges and roads, G.K. Basak, executive secretary at the steel ministry’s joint plant committee, said in a May 14 interview. The government plans to improve the quality of infrastructure steel in the wake of last year’s earthquake and tsunami in Japan, he said.
The rules will impact about 11 million metric tons of low- grade steel capacity, according to a Bloomberg survey of six companies, government officials and analysts.
“With the focus on quality, Tata Steel, Steel Authority and JSW, which are raising capacity, will expand market share and profits,” said Niraj Shah, an analyst Fortune Equity Brokers India Ltd. in Mumbai. “Demand for construction steel is set to grow at a much faster pace than flat steel with higher spending on roads, ports and power infrastructure.”
China, the world’s biggest steel producer and user, began improving product quality after the Sichuan earthquake in 2008, with the industry ministry reiterating in January the need to use more high-strength bars in construction.
Low Cost
About 23 percent of India’s 88 million ton steel capacity comes from low-cost induction furnaces that use coal and are unable to remove phosphorus and other impurities that weaken the alloy. While using gas will lift the grade, the producers will need funds, time and technology to switch to the new fuel, said R.S. Borwankar, assistant vice-president at Welspun Maxsteel Ltd., which uses gas to fire its furnaces.
“Low-priced and poor-quality products will be out of the market,” Mumbai-based Borwankar said in a telephone interview. “That’ll help in building stronger structures that can withstand natural calamities.”
Mandatory standards for steel products are set in most major economies, including China and Japan, according to BSI, a global standards provider. Nations without their own rules adopt either the European or the U.S. guidelines.
Certification from the Bureau of Indian Standards for steel products, now optional, will become mandatory in September, Basak said. While the large steel mills that make certified products will benefit, steel produced in induction furnaces will need to invest in further refining, he said.
India’s steel demand is expected to grow 8 percent in the year ending March 31, faster than the previous year’s 5.5 percent, Basak said last month. While the new guidelines will also apply to imports, India’s overseas steel purchases are unlikely to be hampered as they mostly comprise flat products used in cars and appliances, Fortune Equity’s Shah said.
Rising Imports
India’s imports of steel products gained 0.4 percent to 6.8 million tons in the year ended March 31, according to steel ministry data. Products coming under the new quality norms will include bars, wires, ingots and structural steel.
“Imposing mandatory quality standards for steel is a bold step by India,” K.T. Chacko, director at New Delhi-based Indian Institute of Foreign Trade, said in a telephone interview. “It’ll be wrong to see this as a technical barrier to imports, as the onus is more on the domestic industry.”
Enforcing the new rules may not be straightforward. Small steelmakers apprehending closure may approach local courts to restrain the ministry from imposing the new quality standards, said S.C. Mathur, executive director at Cold-Rolled Steel Manufacturers Association of India.
“Considering the challenges, implementing the order is neither possible nor necessary,” Mathur said.
Taken Share
Large producers such as Tata Steel and JSW have in the past six months already taken market share from smaller mills, which became inviable because of high interest rates and raw material costs, Fortune Equity’s Shah said. The central bank increased key interest rates a record 13 times since March 2010, before lowering them last month.
Prices of construction steel have risen 8 percent since February, while flat steel remained little changed. A decline in supplies and higher demand may lead to an increase in long- product prices when the new rules come into effect, Shah said.
Tata Steel, Steel Authority and JSW would together have increased capacity by 45 percent to about 40 million tons in the two years ending March 31 on forecasts that consumption will surge on government spending. Prime Minister Manmohan Singh plans to attract $1 trillion in investments by 2017 to build power plants, ports and highways, to support economic growth.
“The new guidelines will give us an opportunity to enter new markets,” said Seshagiri Rao, joint managing director at JSW Steel, India’s third-largest producer. “Our products match the best in the industry and we’ll produce more this year following our capacity increase.”
To contact the reporters on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net; Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net
To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Tata Steel Ltd. (TATA), Steel Authority of India Ltd. and JSW Steel Ltd. (JSTL) may increase their share of the $34 billion Indian market as new rules to upgrade product quality force smaller rivals to shut factories.
The Bureau of Indian Standards will introduce norms in September to improve steel used in buildings, bridges and roads, G.K. Basak, executive secretary at the steel ministry’s joint plant committee, said in a May 14 interview. The government plans to improve the quality of infrastructure steel in the wake of last year’s earthquake and tsunami in Japan, he said.
The rules will impact about 11 million metric tons of low- grade steel capacity, according to a Bloomberg survey of six companies, government officials and analysts.
“With the focus on quality, Tata Steel, Steel Authority and JSW, which are raising capacity, will expand market share and profits,” said Niraj Shah, an analyst Fortune Equity Brokers India Ltd. in Mumbai. “Demand for construction steel is set to grow at a much faster pace than flat steel with higher spending on roads, ports and power infrastructure.”
China, the world’s biggest steel producer and user, began improving product quality after the Sichuan earthquake in 2008, with the industry ministry reiterating in January the need to use more high-strength bars in construction.
Low Cost
About 23 percent of India’s 88 million ton steel capacity comes from low-cost induction furnaces that use coal and are unable to remove phosphorus and other impurities that weaken the alloy. While using gas will lift the grade, the producers will need funds, time and technology to switch to the new fuel, said R.S. Borwankar, assistant vice-president at Welspun Maxsteel Ltd., which uses gas to fire its furnaces.
“Low-priced and poor-quality products will be out of the market,” Mumbai-based Borwankar said in a telephone interview. “That’ll help in building stronger structures that can withstand natural calamities.”
Mandatory standards for steel products are set in most major economies, including China and Japan, according to BSI, a global standards provider. Nations without their own rules adopt either the European or the U.S. guidelines.
Certification from the Bureau of Indian Standards for steel products, now optional, will become mandatory in September, Basak said. While the large steel mills that make certified products will benefit, steel produced in induction furnaces will need to invest in further refining, he said.
India’s steel demand is expected to grow 8 percent in the year ending March 31, faster than the previous year’s 5.5 percent, Basak said last month. While the new guidelines will also apply to imports, India’s overseas steel purchases are unlikely to be hampered as they mostly comprise flat products used in cars and appliances, Fortune Equity’s Shah said.
Rising Imports
India’s imports of steel products gained 0.4 percent to 6.8 million tons in the year ended March 31, according to steel ministry data. Products coming under the new quality norms will include bars, wires, ingots and structural steel.
“Imposing mandatory quality standards for steel is a bold step by India,” K.T. Chacko, director at New Delhi-based Indian Institute of Foreign Trade, said in a telephone interview. “It’ll be wrong to see this as a technical barrier to imports, as the onus is more on the domestic industry.”
Enforcing the new rules may not be straightforward. Small steelmakers apprehending closure may approach local courts to restrain the ministry from imposing the new quality standards, said S.C. Mathur, executive director at Cold-Rolled Steel Manufacturers Association of India.
“Considering the challenges, implementing the order is neither possible nor necessary,” Mathur said.
Taken Share
Large producers such as Tata Steel and JSW have in the past six months already taken market share from smaller mills, which became inviable because of high interest rates and raw material costs, Fortune Equity’s Shah said. The central bank increased key interest rates a record 13 times since March 2010, before lowering them last month.
Prices of construction steel have risen 8 percent since February, while flat steel remained little changed. A decline in supplies and higher demand may lead to an increase in long- product prices when the new rules come into effect, Shah said.
Tata Steel, Steel Authority and JSW would together have increased capacity by 45 percent to about 40 million tons in the two years ending March 31 on forecasts that consumption will surge on government spending. Prime Minister Manmohan Singh plans to attract $1 trillion in investments by 2017 to build power plants, ports and highways, to support economic growth.
“The new guidelines will give us an opportunity to enter new markets,” said Seshagiri Rao, joint managing director at JSW Steel, India’s third-largest producer. “Our products match the best in the industry and we’ll produce more this year following our capacity increase.”
To contact the reporters on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net; Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net
To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Sunday, May 13, 2012
Infosys Seen Needing French Deal to Lift Value: Real M&A
By Ketaki Gokhale and Marie Mawad - May 13, 2012
Infosys Ltd. (INFO), India’s second-largest software-services exporter, is seeking European acquisitions as it trades at its lowest valuation since the financial crisis. That’s turning French companies from Sword Group (SWP) to GFI Informatique into potential targets.
Infosys, whose $4 billion cash pile is the biggest among India’s computer-services providers, said last month it’s looking for a European deal after its annual sales forecast trailed analysts’ estimates. With growth curbed by competition, the Bangalore-based company is trading at 15.9 times earnings, the lowest since the aftermath of Lehman Brothers Holdings Inc.’s collapse, according to weekly data compiled by Bloomberg.
A European takeover would help Infosys add a local sales force and new lines of business as it loses the ability to command high prices for basic software development, Ambit Capital Pvt. said. With French information technology companies trading at a median price-to-sales multiple that’s 72 percent cheaper than their western European rivals, Sopra Group (SOP), GFI Informatique and Sword all offer Infosys the footprint it seeks in the region, according to Talence Gestion.
“The need for an acquisition to compete more effectively at the front end seems quite key for Infosys,” Ankur Rudra, a Mumbai-based analyst at Ambit Capital, said. “Unless they are ready to accept lower prices and hence possibly lower margins, they’ll just have to do this. Otherwise, they’ll get competed out of the market.”
Y2K Success
Founded in 1981 with $250 in capital and seven software engineers, Infosys signed its first customer in the U.S. later that year and opened its first overseas office in Boston in 1987, according to its website. With its shares closing last week at 2,311 rupees ($43.15), the 150,000-employee company had a market value of $24.8 billion, data compiled by Bloomberg show. The shares rose 0.8 percent to 2330 rupees each, as of 9:20 a.m. in Mumbai.
Infosys’ sales growth surged as it helped companies tackle the so-called Y2K bug that threatened to reset calendars on computer systems to the year 1900. Annual revenue through March 2001 more than doubled to $416 million, according to data compiled by Bloomberg. The company’s early success made Infosys the “flag-bearer of the Indian IT industry globally,” CLSA Asia-Pacific Markets analysts wrote in a note last month.
The company is now losing ground as Mumbai-based Tata Consultancy Services Ltd. (TCS) and Cognizant Technology Solutions Corp. (CTSH) of Teaneck, New Jersey, chase customers with “new found aggression,” CLSA’s Nimish Joshi wrote in the April 19 note. Armonk, New York-based International Business Machines Corp. (IBM) is also hiring in India to compete for low cost offshore services.
Sales Growth
Infosys’s sales will rise as much as 16 percent to 391.4 billion rupees in the year ending March 2013, the company projected last month. That would be the slowest pace in two decades, excluding fiscal 2010 when revenue growth slowed to 5 percent after the September 2008 bankruptcy of New York-based Lehman spurred the worst financial crisis since the Great Depression, data compiled by Bloomberg show.
In contrast, Tata Consultancy said on April 24 that it has seen “absolutely no problem” for growth this year.
Down 20 percent in the past year, Infosys is trading at 15.9 times net income for the year ended in March. That’s the lowest since May 2009, when global equities were recovering from the bear market spurred by Lehman’s collapse, weekly data compiled by Bloomberg show.
Describing outsourcing work as “commoditized,” the company’s Chief Financial Officer V. Balakrisnan said in February that Infosys is looking for acquisitions that will expand its consulting offerings and intellectual property. That would enable them to vie for higher value contracts with companies from Dublin-incorporated Accenture Plc (ACN) to Paris-based Cap Gemini SA (CAP), Ambit’s Rudra said.
‘Retain Market Share’
“An acquisition that can help them compete more successfully with the likes of global multinational IT services houses such as Accenture, Cap Gemini, IBM, is something they really need,” said Rudra, who has maintained a sell rating on Infosys since January 2011. “Their visibility across the IT services value chain will increase, their ability to gain and retain market share will be enhanced.”
Consulting and systems integration work will be the fastest growing area in information-technology services in the two years to 2013, reaching a total of $465 billion in annual spending, according to a Jan. 6 report by Forrester Research Inc. (FORR) The adoption of cloud-based software that can be accessed via the Internet is reducing the need for basic software customization, Cambridge, Massachusetts-based Forrester said.
‘Really Critical’
The western European information technology market, the second-biggest after North America, reached $211 billion last year, according to Framingham, Massachusetts-based researcher IDC. Although spending in western and central Europe will slow this year as the region grapples with a sovereign debt crisis, Forrester predicts it will rebound in 2013.
Infosys, with $4 billion in cash as of March, can spend as much as $500 million on a single European purchase, Chandrashekar Kakal, global head of business IT services, said last month. Sarah Gideon, an Infosys spokeswoman in Bangalore, declined to comment further on the company’s acquisition plans.
“Europe is really critical,” said Rod Bourgeois, a New York-based analyst at Sanford C. Bernstein & Co. “Acquisitions become very important when you try to expand there because you often need local presence in order to be able to sell to continental European companies.”
The declining value of French technology companies is creating a buying opportunity for Infosys, according to Regis Lefort, who helps oversee more than 150 million euros ($194 million) in assets at Paris-based Talence Gestion.
‘Really Cheap’
After falling 21 percent on average in the past year amid concern that Europe’s debt crisis would spread from Greece, Ireland and Portugal to France, information technology services and application software companies in France worth more than $100 million are trading at a median of 0.5 times sales, according to data compiled by Bloomberg. That compares with 1.8 times for rivals in the rest of western Europe, the data show.
“French IT is really cheap right now,” said Lefort, who cited Sopra, Sword and GFI Informatique (GFI) as logical takeover targets. Talence Gestion owns shares of Sword and GFI Informatique. “They’re medium-sized companies with a strong European presence and healthy finances,” Lefort said.
An acquisition of Sopra, which has 1.05 billion euros in annual sales and more than 14,000 employees, would double Infosys’s revenue from the continent, according to data from the companies. The 44-year-old company, with a market value of 500 million euros, counts Societe Generale SA and European Aeronautic Defence and Space Co. among its customers.
‘Change of Control’
Paris-based Sopra’s sales may increase 13 percent this year to a record and rise through at least 2014, analyst estimates compiled by Bloomberg show. The company ended last week valued at a 52 percent discount to sales.
Any buyer of Sopra would need the approval of Chairman Pierre Pasquier, who owns 26 percent of the company along with co-founders and some managers. The 76-year-old Pasquier’s age may create an opportunity for a takeover, said Fabrice Revol, a fund manager at Paris-based Amplegest, which owns Sopra shares.
“There may well be a change of control when Pasquier decides to leave the company,” Revol said. Virginie Legoupil, a spokeswoman for Sopra, said Pasquier didn’t wish to comment.
A 26 percent retreat in the past year has left GFI Informatique with a market capitalization of 167 million euros.
The Paris-based company trades at 0.27 times sales, compared with the 0.72 times that Japan’s Fujitsu Ltd. (6702) offered in a failed 419 million-euro takeover bid in 2007, according to data compiled by Bloomberg. Tokyo-based Fujitsu scrapped its effort after meeting resistance from GFI Informatique’s board and shareholders who considered the bid too low.
‘Stay Forever’
Still, the opportunity to acquire GFI Informatique may come as investment funds that own more than half the company eventually seek to exit their positions, according to Emmanuel Parot, an analyst at Paris-based Gilbert Dupont.
“More than 50 percent of capital is in the hands of funds which aren’t going to stay forever,” said Parot, who has an “add” rating on the stock. GFI Informatique is targeting revenue of 1 billion euros by 2015, an increase of 62 percent from last year. The company didn’t respond to phone and e-mail requests for comment.
Sword, the smallest of the three companies with a market value of 106 million euros, is also the most expensive at a valuation of 0.68 times sales, data compiled by Bloomberg show. Sword sold 80 million euros of assets last year to focus on higher-margin businesses such as software editing. Founder Jacques Mottard, who owns 18 percent of the 12-year-old company, in 1999 sold Decan, an IT company he had managed for a decade.
‘Key Positioning’
Sword has added cash to its balance sheet faster than any of its French rivals over the past five years, ending 2011 with 112 million euros of cash and short-term investments.
“Sword generates good levels of cash and has key positioning on niche segments that generate high margins,” said Benjamin Terdjman, Paris-based analyst at Genesta Finance. “They’ve got government contracts, contracts with European institutions, basically high-value contracts.”
“Sword is not up for sale,” Stephanie Desmaris, a spokeswoman for the company, said in an e-mail. “Mottard has no exit strategy, as he is leading a new development plan for Sword, which will include acquisitions.”
European companies have begun to adopt outsourcing in greater numbers. They accounted for 51 percent of the world’s outsourcing deals in the first quarter, versus 40 percent two years ago, according to a May 10 report from Everest Group, a Dallas-based consultant.
‘Building a Presence’
“From geographic perspective, continental Europe is very important,” said Sandip Kumar Agarwal, an analyst at Edelweiss Securities Ltd. in Mumbai. “Building a presence there organically is difficult because of language differences and also from the perspective of customers’ comfort. The acquisition route makes more sense.”
Excluding a $28 million acquisition of three back-office service centers in 2007, Infosys hasn’t closed a deal in Europe after discussing the idea for at least a decade, data compiled by Bloomberg show. In 2008, the company walked away from a plan to acquire U.K.-based Axon Group Plc after its 407.1 million- pound ($654 million) bid was trumped by HCL Technologies Ltd. (HCLT)
“They’ve been looking at targets for several years,” said Ambit Capital’s Rudra. “If they choose to go ahead with a target, it would enable them to tell their clients that they’re serious about their strategy.”
To contact the reporters on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net; Marie Mawad in Paris at mmawad1@bloomberg.net.
To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net.
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Infosys Ltd. (INFO), India’s second-largest software-services exporter, is seeking European acquisitions as it trades at its lowest valuation since the financial crisis. That’s turning French companies from Sword Group (SWP) to GFI Informatique into potential targets.
Infosys, whose $4 billion cash pile is the biggest among India’s computer-services providers, said last month it’s looking for a European deal after its annual sales forecast trailed analysts’ estimates. With growth curbed by competition, the Bangalore-based company is trading at 15.9 times earnings, the lowest since the aftermath of Lehman Brothers Holdings Inc.’s collapse, according to weekly data compiled by Bloomberg.
A European takeover would help Infosys add a local sales force and new lines of business as it loses the ability to command high prices for basic software development, Ambit Capital Pvt. said. With French information technology companies trading at a median price-to-sales multiple that’s 72 percent cheaper than their western European rivals, Sopra Group (SOP), GFI Informatique and Sword all offer Infosys the footprint it seeks in the region, according to Talence Gestion.
“The need for an acquisition to compete more effectively at the front end seems quite key for Infosys,” Ankur Rudra, a Mumbai-based analyst at Ambit Capital, said. “Unless they are ready to accept lower prices and hence possibly lower margins, they’ll just have to do this. Otherwise, they’ll get competed out of the market.”
Y2K Success
Founded in 1981 with $250 in capital and seven software engineers, Infosys signed its first customer in the U.S. later that year and opened its first overseas office in Boston in 1987, according to its website. With its shares closing last week at 2,311 rupees ($43.15), the 150,000-employee company had a market value of $24.8 billion, data compiled by Bloomberg show. The shares rose 0.8 percent to 2330 rupees each, as of 9:20 a.m. in Mumbai.
Infosys’ sales growth surged as it helped companies tackle the so-called Y2K bug that threatened to reset calendars on computer systems to the year 1900. Annual revenue through March 2001 more than doubled to $416 million, according to data compiled by Bloomberg. The company’s early success made Infosys the “flag-bearer of the Indian IT industry globally,” CLSA Asia-Pacific Markets analysts wrote in a note last month.
The company is now losing ground as Mumbai-based Tata Consultancy Services Ltd. (TCS) and Cognizant Technology Solutions Corp. (CTSH) of Teaneck, New Jersey, chase customers with “new found aggression,” CLSA’s Nimish Joshi wrote in the April 19 note. Armonk, New York-based International Business Machines Corp. (IBM) is also hiring in India to compete for low cost offshore services.
Sales Growth
Infosys’s sales will rise as much as 16 percent to 391.4 billion rupees in the year ending March 2013, the company projected last month. That would be the slowest pace in two decades, excluding fiscal 2010 when revenue growth slowed to 5 percent after the September 2008 bankruptcy of New York-based Lehman spurred the worst financial crisis since the Great Depression, data compiled by Bloomberg show.
In contrast, Tata Consultancy said on April 24 that it has seen “absolutely no problem” for growth this year.
Down 20 percent in the past year, Infosys is trading at 15.9 times net income for the year ended in March. That’s the lowest since May 2009, when global equities were recovering from the bear market spurred by Lehman’s collapse, weekly data compiled by Bloomberg show.
Describing outsourcing work as “commoditized,” the company’s Chief Financial Officer V. Balakrisnan said in February that Infosys is looking for acquisitions that will expand its consulting offerings and intellectual property. That would enable them to vie for higher value contracts with companies from Dublin-incorporated Accenture Plc (ACN) to Paris-based Cap Gemini SA (CAP), Ambit’s Rudra said.
‘Retain Market Share’
“An acquisition that can help them compete more successfully with the likes of global multinational IT services houses such as Accenture, Cap Gemini, IBM, is something they really need,” said Rudra, who has maintained a sell rating on Infosys since January 2011. “Their visibility across the IT services value chain will increase, their ability to gain and retain market share will be enhanced.”
Consulting and systems integration work will be the fastest growing area in information-technology services in the two years to 2013, reaching a total of $465 billion in annual spending, according to a Jan. 6 report by Forrester Research Inc. (FORR) The adoption of cloud-based software that can be accessed via the Internet is reducing the need for basic software customization, Cambridge, Massachusetts-based Forrester said.
‘Really Critical’
The western European information technology market, the second-biggest after North America, reached $211 billion last year, according to Framingham, Massachusetts-based researcher IDC. Although spending in western and central Europe will slow this year as the region grapples with a sovereign debt crisis, Forrester predicts it will rebound in 2013.
Infosys, with $4 billion in cash as of March, can spend as much as $500 million on a single European purchase, Chandrashekar Kakal, global head of business IT services, said last month. Sarah Gideon, an Infosys spokeswoman in Bangalore, declined to comment further on the company’s acquisition plans.
“Europe is really critical,” said Rod Bourgeois, a New York-based analyst at Sanford C. Bernstein & Co. “Acquisitions become very important when you try to expand there because you often need local presence in order to be able to sell to continental European companies.”
The declining value of French technology companies is creating a buying opportunity for Infosys, according to Regis Lefort, who helps oversee more than 150 million euros ($194 million) in assets at Paris-based Talence Gestion.
‘Really Cheap’
After falling 21 percent on average in the past year amid concern that Europe’s debt crisis would spread from Greece, Ireland and Portugal to France, information technology services and application software companies in France worth more than $100 million are trading at a median of 0.5 times sales, according to data compiled by Bloomberg. That compares with 1.8 times for rivals in the rest of western Europe, the data show.
“French IT is really cheap right now,” said Lefort, who cited Sopra, Sword and GFI Informatique (GFI) as logical takeover targets. Talence Gestion owns shares of Sword and GFI Informatique. “They’re medium-sized companies with a strong European presence and healthy finances,” Lefort said.
An acquisition of Sopra, which has 1.05 billion euros in annual sales and more than 14,000 employees, would double Infosys’s revenue from the continent, according to data from the companies. The 44-year-old company, with a market value of 500 million euros, counts Societe Generale SA and European Aeronautic Defence and Space Co. among its customers.
‘Change of Control’
Paris-based Sopra’s sales may increase 13 percent this year to a record and rise through at least 2014, analyst estimates compiled by Bloomberg show. The company ended last week valued at a 52 percent discount to sales.
Any buyer of Sopra would need the approval of Chairman Pierre Pasquier, who owns 26 percent of the company along with co-founders and some managers. The 76-year-old Pasquier’s age may create an opportunity for a takeover, said Fabrice Revol, a fund manager at Paris-based Amplegest, which owns Sopra shares.
“There may well be a change of control when Pasquier decides to leave the company,” Revol said. Virginie Legoupil, a spokeswoman for Sopra, said Pasquier didn’t wish to comment.
A 26 percent retreat in the past year has left GFI Informatique with a market capitalization of 167 million euros.
The Paris-based company trades at 0.27 times sales, compared with the 0.72 times that Japan’s Fujitsu Ltd. (6702) offered in a failed 419 million-euro takeover bid in 2007, according to data compiled by Bloomberg. Tokyo-based Fujitsu scrapped its effort after meeting resistance from GFI Informatique’s board and shareholders who considered the bid too low.
‘Stay Forever’
Still, the opportunity to acquire GFI Informatique may come as investment funds that own more than half the company eventually seek to exit their positions, according to Emmanuel Parot, an analyst at Paris-based Gilbert Dupont.
“More than 50 percent of capital is in the hands of funds which aren’t going to stay forever,” said Parot, who has an “add” rating on the stock. GFI Informatique is targeting revenue of 1 billion euros by 2015, an increase of 62 percent from last year. The company didn’t respond to phone and e-mail requests for comment.
Sword, the smallest of the three companies with a market value of 106 million euros, is also the most expensive at a valuation of 0.68 times sales, data compiled by Bloomberg show. Sword sold 80 million euros of assets last year to focus on higher-margin businesses such as software editing. Founder Jacques Mottard, who owns 18 percent of the 12-year-old company, in 1999 sold Decan, an IT company he had managed for a decade.
‘Key Positioning’
Sword has added cash to its balance sheet faster than any of its French rivals over the past five years, ending 2011 with 112 million euros of cash and short-term investments.
“Sword generates good levels of cash and has key positioning on niche segments that generate high margins,” said Benjamin Terdjman, Paris-based analyst at Genesta Finance. “They’ve got government contracts, contracts with European institutions, basically high-value contracts.”
“Sword is not up for sale,” Stephanie Desmaris, a spokeswoman for the company, said in an e-mail. “Mottard has no exit strategy, as he is leading a new development plan for Sword, which will include acquisitions.”
European companies have begun to adopt outsourcing in greater numbers. They accounted for 51 percent of the world’s outsourcing deals in the first quarter, versus 40 percent two years ago, according to a May 10 report from Everest Group, a Dallas-based consultant.
‘Building a Presence’
“From geographic perspective, continental Europe is very important,” said Sandip Kumar Agarwal, an analyst at Edelweiss Securities Ltd. in Mumbai. “Building a presence there organically is difficult because of language differences and also from the perspective of customers’ comfort. The acquisition route makes more sense.”
Excluding a $28 million acquisition of three back-office service centers in 2007, Infosys hasn’t closed a deal in Europe after discussing the idea for at least a decade, data compiled by Bloomberg show. In 2008, the company walked away from a plan to acquire U.K.-based Axon Group Plc after its 407.1 million- pound ($654 million) bid was trumped by HCL Technologies Ltd. (HCLT)
“They’ve been looking at targets for several years,” said Ambit Capital’s Rudra. “If they choose to go ahead with a target, it would enable them to tell their clients that they’re serious about their strategy.”
To contact the reporters on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net; Marie Mawad in Paris at mmawad1@bloomberg.net.
To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net.
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
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