Reliance Asset Says Cash Crunch Needs Reserve Cuts: India Credit

By V. Ramakrishnan - Jun 15, 2012

India’s biggest fund managers say the central bank needs to cut lenders’ reserve requirements to revive economic growth as cash shortages in the financial system enter a record eighth month.
The “excessive focus” of policy makers on curbing inflation could limit access to funds that companies need for expansion, according to Reliance Capital Asset Management Ltd., the nation’s second-largest money manager, which oversees more than $14 billion. Reducing the ratio of cash that banks have to set aside is a “more critical issue” than lowering borrowing costs, according to ICICI Prudential Asset Management Co., which manages $12.3 billion.
Lenders’ borrowing from the central bank, a measure of cash shortages, was 824 billion rupees ($14.8 billion) a day this month, above the 600 billion rupee maximum limit favored by the Reserve Bank of India. Benchmark yields dropped two basis points in June to 8.36 percent as economists predict that policy makers will cut borrowing costs next week. Similar yields rose three basis points in China and six basis points in the U.S.
“More than cutting rates, there has to be a change in stance on liquidity to boost growth,” Amitabh Mohanty, the Mumbai-based head of fixed income at Reliance Capital, said in an interview on June 13. “This is the right time to ensure that there is a surge in liquidity, because the overall sentiment surrounding the economy is very poor.”

Repurchase Rate

Lenders borrowed 914 billion rupees on average from the central bank every day in the past year, compared with 608 billion rupees in the prior 12 months, according to Reserve Bank data. M3, which includes currency in public circulation and bank deposits, rose 13.7 percent in the year through June 1, below the monetary authority’s projection of 15 percent.
State Bank of India, the nation’s largest lender by assets, expects a 1 percentage point cut in the reserve ratio because of the cash crunch, Chairman Pratip Chaudhuri told reporters in New Delhi on June 12. That call isn’t the consensus, with only five of 22 economists in a Bloomberg survey predicting the Reserve Bank will reduce the proportion by 50 basis points to 4.25 percent on June 18.
The monetary authority will lower the repurchase rate, at which it lends, by 25 basis points to 7.75 percent, the survey showed.

Funding Stress

Reliance Capital and ICICI Prudential, the nation’s third- largest fund manager, say the Reserve Bank should cut the reserve ratio by 50 basis points. HDFC Asset Management Co., which oversees $16.2 billion as the biggest money manager, declined to comment.
“I would prefer to see a cut in reserve requirements rather than the repo rate,” Chaitanya Pande, the Mumbai-based head of fixed-income investments at ICICI Prudential, said in an interview on June 13. “It will remove the stress on banks to borrow at any rate.”
Yields on three-month certificate of deposits, which represent the cost of bank borrowings, were 9.05 percent today, 105 basis points, or 1.05 percentage points, above the central bank’s lending rate.
The yield on the 8.79 percent bonds due November 2021 rose two basis points to 8.36 percent today, paring the decrease for this quarter to 23 basis points. The premium over similar- maturity U.S. Treasuries has shrunk 47 basis points this month to 643, according to data compiled by Bloomberg.
Rupee-denominated securities returned 4.6 percent this year, the best performance among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc. That was 208 basis points more than what investors got from South Korean notes, which saw the second-highest increase.

Growth Trade-Off

Accelerating inflation may prevent policy makers from cutting the cash reserve ratio, according to the local unit of Daiwa Asset Management Co., which oversees about $143 million. Wholesale prices rose 7.55 percent last month from a year earlier after increasing 7.23 percent in April, a commerce ministry report showed yesterday. The economy expanded 5.3 percent in the three months through March, the slowest pace since 2003, government data showed two weeks earlier.
“It’s a trade-off between growth and inflation,” Killol Pandya, the Mumbai-based head of fixed-income investment at Daiwa Asset, said in an interview yesterday. “As things stand now, there is only an outside chance of a CRR cut as it will immediately contribute to inflation. I’m not unduly bullish on the RBI easing monetary policy.”
The rupee weakened 0.2 percent to 55.7050 per dollar today. It advanced 0.7 percent this month. Only the Philippine peso, South Korea’s won and Thailand’s baht have fared better among Asia’s most-traded currencies.

Deposit Growth

Credit-default swaps on State Bank, which protect the debt of the lender against a default, fell one basis point this month to 381, according to CMA, which is owned by CME Group Inc. and compiles prices quoted in privately negotiated markets. Some traders consider the bank a proxy for the sovereign. The swaps pay face value if a company fails to adhere to debt terms.
Slowing growth in bank deposits requires Reserve Bank action, according to ING Vysya Bank Ltd., the local unit of the biggest Dutch financial services company. Savings at lenders rose 14.13 percent in the year through May 25, below the 16 percent growth projected by the monetary authority for the current fiscal year.
“I don’t see how the RBI, without easing liquidity, can target deposit growth” above what it is now, Shailendra Bhandari, the Mumbai-based managing director and chief executive of ING Vysya Bank, said in an interview on June 13. “I fully agree with the SBI chairman that there is a need for a reserve- ratio cut,” he said, predicting a 25 basis point reduction.
To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net
To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net

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India Stock Futures Gain on Global Stimulus Speculation By Shikhar Balwani - Jun 15, 2012

Indian stocks rose, capping a second weekly advance for the benchmark index, on speculation central banks in India, Europe and the U.S. may act to boost economies amid faltering growth and as local companies paid higher taxes.

Tata Motors Ltd. (TTMT), India’s biggest automaker, surged 6 percent after Chairman Ratan Tata bought the company’s shares and sales at its Jaguar Land Rover unit rose more than analysts estimated. Asian stocks climbed as the stimulus optimism countered concerns Europe’s debt crisis will worsen. Hindustan Unilever Ltd. (HUVR), the Indian unit of the world’s second-largest consumer goods company, climbed 2 percent to a record.

The BSE India Sensitive Index (SENSEX), or Sensex, jumped 1.6 percent to 16,949.83 at close. The gauge rose 1.4 percent this week. Bank of England Governor Mervyn King said yesterday the case for looser policy is “growing,” while U.S. economic data may support the case for further stimulus from the Federal Reserve, which meets for two days from June 19.

“Global optimism drove Indian equities after we saw a good correction yesterday,” said Anita Gandhi, a director at Arihant Capital Markets Ltd. in Mumbai. “Markets believe the Reserve Bank of India will certainly ease monetary policy. The question is what would be the quantum of easing.”

The RBI may lower rates for a second time this year at its policy review on June 18 amid the slowest economic expansion in nine years, economists say, even as data yesterday showed wholesale prices accelerated for a second month in May.

Interest-rate Outlook

The central bank will cut a key rate by 25 basis points to 7.75 percent, according to 19 of 25 economists in a Bloomberg survey. Four predict the central bank will leave the rate unchanged and two forecast a 50-basis-point cut.

China cut borrowing costs on June 7 for the first time in more than three years, two days after Australia reduced rates.

India’s inflation quickened a faster-than-estimated 7.55 percent, after rising 7.23 percent in April. The median of 37 forecasts in a Bloomberg survey was for a 7.5 percent gain. A separate report showed a drop in exports and imports last month.

Economic expansion in the first quarter was the weakest in almost a decade as a policy gridlock in the ruling coalition undermined Prime Minister Manmohan Singh’s efforts to revive the economy and the debt crisis in Europe, India’s top trading partner, crimped exports. Government data earlier this week showed factory output grew less than analysts estimated in April, adding to the case for a rate cut.

The MSCI Asia Pacific Index (MXAP) climbed 1 percent at 4:44 p.m. in Mumbai today. European stocks advanced for the first time in three days, with the Stoxx Europe 600 Index (SXXP) gaining 1.1 percent.

Greek Vote

On June 17, almost 10 million Greeks will vote for the second time in six weeks after a May 6 ballot failed to result in a government. The constitution permits a third election too. Exit polls will be released when voting ends at 7 p.m.

The Sensex rallied 4.7 percent last week, its best weekly advance this year, amid speculation the RBI would ease monetary policy. The gauge has climbed 9.7 percent this year and trades at 13.3 times estimated earnings. The MSCI Emerging Markets Index (MXEF) trades at 10 times.

Tata Motors surged 6 percent to 240.3 rupees, the biggest rally in four months. The company reported deliveries at its British luxury-automobile unit increased 35 percent to 30,094 vehicles in May, exceeding the 28,175 average estimate of 11 analysts surveyed by Bloomberg. Ratan Tata bought 425,000 shares at 233.87 rupees apiece yesterday, the company said in a separate stock exchange filing.

Advance Tax

Hindustan Unilever climbed 2 percent to a record 449.45 rupees. The company is paying 1.4 billion rupees of tax for the quarter ending June, compared with 950 million rupees last year, said a deputy commissioner at Mumbai’s income tax department, who declined to be identified citing rules.

Companies pay tax in advance based on their estimated income for the year, a measure monitored by investors as an indicator of profitability.

ICICI Bank Ltd. (ICICIBC), the second-largest lender, jumped 3.3 percent to 845.70 rupees, the most since May 25. The bank increased advance-tax payment 25 percent, the official said. HDFC Bank Ltd. (HDFCB) advanced 2.5 percent to 547.55 rupees.

Coal India Ltd. (COAL), the world’s largest producer of the fuel, rallied 2.6 percent to 339.70 rupees, the most since April 26, and Larsen & Toubro, India’s largest engineering company, gained 2.1 percent to 1,323.75 rupees.

India VIX, which measures the cost of protection against losses in the S&P CNX Nifty Index, slid 0.7 percent to 25.54. The Nifty jumped 1.7 percent to 5,139.05 while its June futures settled at 5,147.70. The BSE-200 Index (BSE200) rose 1.5 percent to 2,074.76. Combined trading volume on India’s top two exchanges was 690.65 million shares yesterday, compared with a 12-month daily average of 906.39 million.

Overseas investors were net buyers of local shares for a sixth straight day on June 13, purchasing a net $49 million of stocks and taking their total investment this year to $8.56 billion, data from the regulator show. They cut holdings by $273 million in May, a second consecutive month of net sales.

To contact the reporter on this story: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

ING Sees Growth in Slowdown as Defaults Decline: Corporate India By George Smith Alexander and Anto Antony - Jun 14, 2012

ING Vysya Bank Ltd. (VYSB), the only Indian lender to be controlled by a foreign company, plans to expand credit at a faster pace than local rivals even as the economy slows betting that borrowing costs and defaults will decline.

India’s central bank will probably cut the amount of money banks are required to set aside as reserves as well as the repurchase rate by a quarter percentage point next week, ING Vysya Chief Executive Officer Shailendra Bhandari, 53, forecast in an interview in Mumbai. The Bangalore-based bank is backed by ING Groep NV (INGA), the biggest Dutch financial services company.

The lender will increase credit to mid-sized companies and households in the world’s second-most populated nation as cheaper borrowing costs reduce default risk. Bhandari predicts ING Vysya’s loans will rise more than the central bank’s estimate of 17 percent growth for lenders in an economy that grew at the slowest pace in nine years.

“Medium-sized banks can always grow faster if they focus on the right businesses as they are more nimble in finding the right opportunities,” Nitin Kumar, a Mumbai-based bank analyst at Quant Broking Ltd., said by telephone yesterday. “ING Vysya’s asset quality is good and the bank has avoided many sectors that are under stress.”

India’s economy expanded 5.3 percent in the three months through March. It may grow 6.5 percent to 7 percent this year, Montek Singh Ahluwalia, the deputy chairman of the nation’s planning commission, said on June 8, falling short of Prime Minister Manmohan Singh’s goal of 9 percent annual gains.

Rising Defaults

The slowdown has put pressure on corporate borrowers including airlines and developers. Air India Ltd. is getting a $5.7 billion government bailout while Kingfisher Airlines Ltd. (KAIR) was forced to shut some services because of a cash shortage and losses. At least three companies including Hotel Leela Venture Ltd. (LELA) have also missed convertible bond payments this year.

Soured loans may more than double to 5.8 percent of total advances by March 2013 in a worst-case scenario if the economy continues to falter, the Reserve Bank of India estimated in December. Fitch Ratings said last month that the slowing growth is worsening lenders’ balance sheets.

ING Vysya has curbed its default ratio by avoiding loans to power companies, real estate developers and airlines, Bhandari said in Mumbai on June 13. The bank’s net bad loans narrowed to 0.18 percent of total advances for the year ended March 31, from 0.39 percent the previous year, it said April 24.

“I have been telling people from 2010 that because of high interest rates and the slowing economy, bad loans will rise,” he said. “Hopefully, the worst might be over.”

Stock Performance

ING Vysya fell 1.3 percent to 331.4 rupees in Mumbai yesterday. The stock has risen 14 percent this year lagging behind the 24 percent gain in the Bankex index, which tracks the performance of 14 rivals including State Bank of India (SBIN), the nation’s largest.

Bhandari’s forecast for policy easing at the June 18 Reserve Bank of India meeting matches that of most economists. Governor Duvvuri Subbarao may cut the repurchase rate by 25 basis points to 7.75 percent to support economic growth, according to 14 of 18 economists in a Bloomberg survey.

The monetary authority lowered borrowing costs to 8 percent from 8.5 percent on April 17. It has also cut the amount lenders must set aside as reserves twice in 2012 to ease a cash squeeze in the economy.

Bhandari was hired as head of ING Vysya in August 2009. He had previously been chief executive officer of Centurion Bank of Punjab Ltd., which was acquired by HDFC Bank Ltd. in 2008.

Capital Requirements

ING Vysya, which raised 9.7 billion rupees through selling shares in June 2011 to large investors and a preferential allotment of equity to ING Groep, doesn’t plan to raise capital until March, Bhandari said this week. The lender had a capital adequacy ratio of 14 percent as of the end of March.

In 2002 ING Groep increased its stake in the bank to 44 percent from 20 percent. ING inherited 10 percent of Vysya Bank when it bought Belgium’s Bank Brussels Lambert SA in 1998. It increased its holding to 20 percent in November 1999.

Loans at Indian banks in total will climb 17 percent in the current financial year, the Reserve Bank said in April. That would be a slowdown from the 19.4 percent expansion in the twelve months to March 31.

Indian lenders may also have to raise as much as $50 billion to add to their retained earnings to meet Basel III capital requirements being set by the country’s central bank, with more than 75 percent of the funds being required in the two years starting April 1, 2016, Fitch Ratings said in May.

ING Vysya had 293 billion rupees ($5.3 billion) in outstanding loans as of March 31, after expanding credit by 22 percent in the 12 month period. That compared with 8.9 trillion rupees at State Bank of India, and 2.5 trillion rupees at No. 2- ranked ICICI Bank Ltd. (ICICIBC) The lender’s profit rose by 43 percent for the year to 4.56 billion rupees.

“There is nothing to bite us down the line in terms of bad loans,” said Bhandari.“We are looking at consistency and predictability in earnings.”

To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; Anto Antony in Mumbai at aantony1@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

Rain, Pests Imperil India’s Wheat Crop as Warehouses Full

By Pratik Parija and Prabhudatta Mishra - Jun 13, 2012

India, the world’s second-biggest wheat producer, risks losing more than 6 million metric tons of grain to rain and pests as the country lacks warehouses to stockpile crops that have risen to records for six years.

Wheat is kept in the open across markets in north India as state granaries are overflowing with about 82 million tons of rice and wheat, Food Minister K.V. Thomas said in an interview in New Delhi. A group of ministers will soon consider the sale of about 13 million tons of wheat and rice to the poor and in the open market at subsidized rates, and discuss steps to boost exports to create room for newly harvested crops, he said.

Efforts to draw down stockpiles may boost shipments from India, adding to global supplies and extending the biggest slide in food prices in two years as measured by the United Nations’ Food & Agriculture Organization. Overflowing granaries may hasten a plan to enact a law to guarantee food grain to 64 percent of India’s 1.2 billion people, where the World Bank says more than 75 percent of the people live on less than $2 a day.

“Grains kept unscientifically are susceptible to damage” Thomas said yesterday. “Earlier also, some quantities were under unscientific storage, but not to this extent as seen this year. Experts team has already gone to the states to look into what has to be done so that there is no damage.”

State reserves of food grain almost quadrupled to 82.4 million tons as of June 1 after the nation harvested record wheat crops starting in the 2006-2007 season. The government, the single biggest buyer of food crops in the country, purchases grain at guaranteed rates from farmers to sell to the poor.

‘It Will Rot’

“There won’t be any problem of storage if the government distributes the food grains at reduced prices,” said Biraj Patnaik, principal adviser to the country’s Supreme Court on food issues. “It will rot after monsoon rains start if government does not act fast.”

The government will immediately evacuate about 6.6 million tons of wheat kept in the open, enough to meet Japan’s annual demand, Thomas said. Additional warehousing capacity of 15.1 million tons will be added in the year ending March 31, he said.

A rebound in global wheat production and a slump in prices have thwarted India’s efforts to boost exports after the country lifted a four-year ban on shipments in September, said Atul Chaturvedi, chief executive officer of Adani Wilmar Ltd.

‘Time Bomb’

“With rains round the corner, I think they are sitting on a time bomb with such a huge stockpile of wheat,” he said. “They have to incentivize and get rid of the stockpile through exports. Otherwise, they will ultimately end up having a much bigger problem.”

Wheat for December delivery was little changed at $6.5875 a bushel on the Chicago Board of Trade at 10:37 a.m. in Singapore. The most-active price has gained 0.9 percent in the past year.

Wheat stockpiles climbed to an all-time high of 50.2 million tons as of June 1 from 37.8 million tons a year earlier, according to the Food Corp. of India. Rice inventory was 32.15 million tons, compared with 27.64 million tons a year earlier, it said. The stockpile also included 94,000 tons of so-called coarse cereals.

The wheat crop will probably reach 90.2 million tons in the year to June 30, up from 86.9 million tons a year earlier, while the rice harvest may gain to a record 103.4 million tons from 96 million tons, according to the farm ministry.

To contact the reporters on this story: Pratik Parija in New Delhi at pparija@bloomberg.net; Prabhudatta Mishra in New Delhi at pmishra8@bloomberg.net

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net; Sam Nagarajan at samnagarajan@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED

U.S. Drug Boom Seen Improving Wockhardt’s Profit Margins

By Adi Narayan - Jun 11, 2012

Wockhardt Ltd. (WPL) Chairman Habil Khorakiwala says U.S. sales growth and a record profit margin may lure more investors to his company, the world’s top performing major generic drugmaker this year.

The Mumbai-based firm forecasts revenue from the biggest market for prescription medicines to increase 25 percent annually in the next few years, Khorakiwala said in an interview yesterday. Wockhardt earned about 41 percent, or $375 million, of its sales in the U.S. in the 12-months ended March 31, he said.

Wockhardt’s shares have more than tripled this year as the company sells assets to revamp $687 million of debt. Israel’s Teva Pharmaceutical Industries Ltd. (TEVA), the world’s largest generic drugmaker, is little changed. Khorakiwala, 69, plans to introduce as many as 15 copies of drugs each year in the U.S. to tap revenue from treatments losing patent protection.

“We are gaining market-share everywhere with our portfolio of 70 products,” Khorakiwala said, predicting a “tectonic shift in terms of the perception of our company in the next three years.”

Wockhardt, set up in 1967, fell 0.2 percent to 865.9 rupees in Mumbai yesterday. Five of the six analysts covering the insulin-maker recommend a buy, while one has a hold rating, according to data compiled by Bloomberg. The BSE India Healthcare Index (BSETHC) has risen 12 percent this year.

Khorakiwala, who has been collecting art for three decades, controls about 74 percent of the company. The family has pledged 64 percent of the firm as collateral to borrow funds, according to exchange filings.

Nasal Spray

Wockhardt began rallying after the firm on Jan. 10 said its copy of GlaxoSmithKline Plc’s Flonase nasal spray was approved by the U.S. Food & Drug Administration for sale in the North American nation.

The treatment may generate $43.5 million of sales for Wockhardt in the year that began April 1, according to Ventura Securities Ltd. Wockhardt introduced 6 products in the world’s biggest economy last fiscal year, according to an investor presentation.

Sales in the U.S. helped the company widen its earnings margin before interest, taxes, depreciation and amortization to 31.2 percent in the year ended March 31, compared with 24.2 percent in 2011. Profit may more than triple to 11.6 billion rupees ($208 million) this fiscal year, according to a median estimate of four analysts compiled by Bloomberg.

Profit margins may improve further as the company gets exclusive rights to sell copies of some medicines in the U.S., according to a report by Finquest Securities Pvt. About 72 medications with annual sales of at least $100 million are expected to lose patent protection in the U.S. in the next four years, according to Bloomberg Industries.

‘Steady Stream’

Rivals are also benefiting from the drug market opening to generic competition. Ranbaxy Laboratories Ltd. (RBXY), India’s biggest pharmaceutical maker, became the first company to sell copies of the anti-hypertention medicine Lipitor and probably earned $300 million in sales in the first three months of the year, brokerage IIFL Ltd. said in a May 10 report.

Wockhardt’s shares are a “strong buy” because they are cheap compared with local rivals, said Anand Bagaria, an analyst with Finquest. Wockhardt trades at 8 times fiscal 2013 earnings, compared with 15.6 for Dr. Reddy’s Laboratories Ltd. and 16.8 for Lupin Ltd., according to data compiled by Bloomberg.

For the company to maintain the rally, Wockhardt will have to demonstrate that relying on exclusive sales of generic drugs will provide a steady stream of revenue, said Surya Narayan Nayak, head of research at Networth Stock Broking Ltd.

“Only when there are steady earnings for four to six quarters will the market have faith in this stock,” Mumbai- based Nayak said in a telephone interview. “Otherwise it will keep trading at a discount to its peers.”

Debt Dispute

The company’s move to resolve a dispute with bondholders has also aided in the stocks advance. In 2009, Wockhardt agreed to extend maturities of some of its debt until 2018 and capped the rate of interest at 10 percent, according to a note to investors. It also restructured $250 million loans from European lenders.

Holders of its foreign currency convertible bonds that matured in October 2009 were offered the option to swap them for preference shares redeemable in 2018, or receive a discounted single payment.

Some bondholders, including U.S. hedge fund QVT Financial LP filed a petition in the Bombay High Court to liquidate the company. The court on Oct. 11, ordered Wockhardt to pay 3.15 billion rupees in five installments to the remaining bondholders. The last installment of 1.6 billion rupees is due in August.

Asset Sale

The drugmaker in August agreed to sell its nutrition business to Danone for 250 million euros ($314 million), and plans to use the funds to pay its debt, Khorakiwala said. The sale includes the Dexolac, Farex and Protinex brands and is awaiting regulatory approval from Indian authorities.

“Investors who bought this stock last year at this time have made loads of cash,” Finquest’s Bagaria said. “There was a lot of negative sentiment associated with the company’s debt troubles and that’s what made it so cheap.”

To contact the reporter on this story: Adi Narayan in Mumbai at anarayan8@bloomberg.net

To contact the editor responsible for this story: Jason Gale at j.gale@bloomberg.net

Infosys Skirts Italy, Spain Software Deals on Euro Crisis

By Ketaki Gokhale - Jun 10, 2012

Infosys Ltd. (INFO), India’s second-largest software exporter, is shunning Italy and Spain as risks from the worsening sovereign-debt crisis outweigh a goal of doubling the share of sales from Europe.

“We have stayed away from these markets,” said B.G. Srinivas, head of Europe at Bangalore-based Infosys, referring to Greece, Portugal, Italy and Spain. “Especially in a crisis, I don’t think that we will revisit that decision soon. It’s the wrong time to enter.”

Uncertainty over payments and exchange-rate volatility means Indian software companies are wary of striking outsourcing deals in Europe’s weaker economies even as they try to reduce their dependence on the U.S. for revenue. Spain became the fourth euro member to seek a bailout since the start of the crisis with a request on June 9 for as much as 100 billion euros ($125 billion) to rescue its banks.

Infosys’s strategy underlines the chilling effect the turmoil in Europe is having on companies and economies around the world. With the euro area registering no growth in the first quarter and India’s expansion the slowest in nine years, Infosys is betting it can do without a slice of the combined 58 billion euros ($72 billion) that Forrester Research Inc. (FORR) estimates governments and businesses in Italy and Spain will spend on information technology goods and services in 2012.

‘Right Strategy’

“It’s the right strategy,” said Shashi Bhusan, an analyst at Prabhudas Lilladher Pvt. in Mumbai who rates Infosys buy. “If an implosion happens in the euro zone, there’s going to be a wider impact -- not just in terms of IT spending.”

Forrester predicts the European information technology market could shrink by as much as 10 percent in 2012 if a country exits the euro. The single currency slipped to an almost two-year low against the dollar this month as policy makers clash over how to resolve the crisis, now in its third year.

Citigroup Inc. economists are assuming as a “base case” that Greece will leave the single currency on Jan. 1, 2013. Bank of America Merrill Lynch strategists estimate the euro-region’s gross domestic product would contract at least 4 percent in the recession that follows, similar to the decline suffered after Lehman Brothers Holdings Inc.’s 2008 collapse.

Infosys has declined 13 percent in Mumbai trading this year, compared with a 6.1 percent gain for larger rival Tata Consultancy Services Ltd. (TCS) India’s benchmark Sensitive Index has rallied 8.2 percent. Infosys slumped the most in almost three years on April 13 after forecasting full-year sales that missed analyst estimates.

Double Share

Infosys, which aims to almost double the share of revenue from European customers to 40 percent from 22 percent in the year ended March 31, has said it is prepared to spend as much as $500 million on a single acquisition in a European market. Tata Consultancy, based in Mumbai, is also weighing acquisitions in France, Germany, Japan and the U.S., Chief Executive Officer Natarajan Chandrasekaran said in September.

The U.S., the world’s biggest market for IT services, buys about 60 percent of the South Asian country’s computer services, according to the National Association for Software & Services Companies. North America accounted for 65 percent of Infosys’s sales last year, according to its annual report.

Infosys still sees opportunities in parts of Europe where companies are striving to compete in the global market, Srinivas said.

“There’s definitely a perceptible shift in the mindset of companies” in Germany and France, he said. “They’re definitely looking at increasing their own competitiveness because they’re competing globally with the American companies, the Japanese companies, the Koreans. So, they have to improve their internal cost base.”

Currency Volatility

HCL Technologies Ltd. (HCLT), the New Delhi-based software exporter which outbid Infosys to acquire U.K.-based Axon Group in 2008, is mainly focused on the U.K., and Nordic, French and German-speaking countries, according to Rajeev Sawhney, president for European operations. HCL doesn’t have local teams in Greece, Portugal, Spain and Italy, he said.

“I would hesitate from going into the turmoil at this stage,” said Sawhney. “It could have other repercussions -- whether you’d get paid, whether you’d get paid on time. What could be the volatility in the currency exchange rate?”

HCL is targeting companies in Europe which are adopting austerity measures and who need help implementing cost cuts, said Sawhney. The pressure on corporate budgets means there is an increasing percentage of “first-time outsourcers” in the region, he said.

Revenue from Europe at Infosys grew 26 percent in the 12 months ended March 31, double the previous year’s pace, to 66.1 billion rupees ($1.2 billion), according to the company’s annual report. Sales in the North American market increased 21 percent in the period to 203.5 billion rupees.

Rating Downgrades

Brokerages including Nomura Holdings Inc., Goldman Sachs Group Inc., Macquarie Group Ltd. and CLSA Asia-Pacific Markets cut their recommendations on Infosys in April after the software exporter’s annual sales forecast trailed estimates.

Infosys on April 13 predicted sales in the year that began April 1 will be between 384.3 billion rupees and 391.4 billion rupees. That lagged behind the 396.3 billion-rupee median of 64 analysts’ estimates compiled by Bloomberg.

Meanwhile the financial turmoil in Europe has shown little sign of ending. While European Central Bank President Mario Draghi left the door open at a June 6 press conference to a rate cut, he highlighted the limitations of the ECB’s tools as policy makers scramble to avoid the breakup of the single currency.

“As long as the implosion doesn’t happen -- the overall uncertainty is something all of us can handle because we are all prepared for it,” said Srinivas. “As long as that continues, business will be steady. If implosion happens, we’ll have a very unpredictable situation.”

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.नेट

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.