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BIG NEWS – Jul 14th 2017

Posted on 14-Jul-2017 Comments  0

TCS Q1 Results

There is bad news on the Tech Front

If TCS, the most valuable Indian company, was judged by its latest quarter results, then it was surely an unalloyed disappointment. What actually disappointed an investor is not just the quarterly performance but the consistently weakening metrics over the last 12 quarters. Agreed that the global environment is not too conducive for IT companies! Tech spending is down, the focus is shifting increasingly digital and India’s US equation is riled by visa related issues. But the problem at TCS is slightly larger than that…

Consistent weakening at TCS…

One has to only look at the sequential performance of TCS over the last 12 quarters, both in terms of growth and margins. The operating profit margin (OPM) of TCS has fallen from closer to the 27.6% in 2015 to around 25.3% in 2017. There is pressure on realized margins due to stiffer competition and more demanding clients. But, TCS has also not able to diversify its core model to adapt to the changing conditions, as it was expected to be doing.

The bigger problem for TCS is growth. Of course, TCS has attained a certain size and sloth and therefore rapid growth is unlikely to happen. But the growth rate of TCS top-line has fallen by over 600 basis points from 12.3% to 6.1%. There is a fundamental drag on the TCS financials and the worry is that this could continue in next quarter too.

Business is shrinking…

For the first time in the last 30 quarters, TCS actually reported a fall in its employee head count. While this can be partially attributed to automation, the fact that the net profit has shrunk by 10% shows that TCS does not really have work for its large workforce. That is something TCS has not faced in the last decade. The digital share of TCS, which the company claims to be above 16%, has a different problem. Globally, the larger chunk of digital orders is going to newer players than to traditional players. That means the digital market share of TCS could be saturating sooner rather than later.That begs the basic question; where will the growth for TCS come from?

Where will growth come from?

That is perhaps the billion dollar question confronting TCS shareholders and analysts. The traditional strongholds of BFSI, oil & gas,telecom, retail and manufacturing have hardly been growing and that is evident from the sector-wise market share of TCS. As Mr. Narayana Murthy said last month, “The IT industry is in a similar situation it found itself in 2001 after the dotcom bust”. The onus will be on the TCS top management to provide that leadership for the IT industry. That was missing in the Q1 results. That was, perhaps, what really disappointed the markets a lot more than growth and margins! ©


Remember, there are clear merits in oil consolidation…

The government has almost made it clear that the ONGC – HPCL deal will be consummated in the month of July 2017 itself. While the actual contours of the deal are not yet clear, this should be seen as the first step towards the oil sector consolidating. Here is how the deal will actually work out…

Sorry,not a divestment…

The government of India has been at pains to underscore the fact that the sale of HPCL is not exactly a traditional divestment measure. Under the proposed deal, the government will sell its 51.11% stake in HPCL to ONGC for a consideration of around $4.5 billion. This will be a big boost to the government as it tries to get closer to its full year divestment target of $11 billion. But the bigger consideration for the government will be to retain control over the hydrocarbon segment within the public sector. HPCL and BPCL are high dividend yield companies and the government will prefer that these payouts are retained within the PSU space. An ONGC buyout will fit that bill.Also from the point of view of oil security, it will be a more favorable situation if the control of the oil companies is retained within the public sector. This will enable the oil ministry and the government to have a greater control over the investment and spending decisions of the oil companies. With this acquisition, control and security can still be maintained.

Acquisition not a merger…

The government is likely to prefer a sale of HPCL shares to ONGC with HPCL retaining its entity as a listed company. Of course, post the deal HPCL will be a subsidiary of ONGC. But, merging HPCL into ONGC would mean that HPCL would cease to exist and that would be unfair to the shareholders of HPCL. Also HPCL is a highly profitable company and keeping these two companies separate will give ONGC a better hedge in a volatile oil market with management independence for HPCL.

Big story is consolidation…

There all big story here is that India is now adopting the global paradigm of creating oil be he months that span the entire hydrocarbons value chain. Global giants like Exxon, Chevron, Shell, Total and A ram cooperate in the entire value chain including extraction, off shore drilling, refining, distribution, marketing and downstream products like pet chem. This can only be achieved by inorganic expansion and global acquisitions. For that, Indian oil companies will require much larger balance sheets and that is possible only if these oil companies are merged. In fact, HPCL may just be the beginning. As Arun Jaitley admitted, the eventual idea will be merge all the oil and gas companies into one single behemoth. That is the way world oil operates and that is, perhaps, the right road ahead for India too! ©

IDFC and Shriram

The logic is good but practical difficulties a bound…

In one of the biggest merger announcements in the financial sector, IDFC and Shriram have agreed to come together to create a financial behemoth that spans banking and most aspects of financial services.While the merger is still subject to regulatory approvals, there is obviously a lot of thinking that has gone into this merger deal. But first let us look at the basic structure of the deal.

How the deal is structured…

Considering the size of both the companies, the actual deal is likely to be quite complex. There are two key companies in the Shriram Group viz. Shriram Transport and Shriram City Union which will be part of this merger. While SCUF will be entirely merged into IDFC Bank, Shriram Transport will become a 100% subsidiary of the parent IDFC. Therefore the parent IDFC will now emerge as the holding company for the combined group. There is a strong reason why Shriram Transport has not been merged into IDFC.

Shriram Transport has a loan book that is larger than IDFC Bank and hence the bank may have a bandwidth issue managing a surge in operating size.If it had merged with IDFC then the equity dilution would have pushed IDFC’s stake in the bank below the stipulated 40%.While SCUF will cease to exist, Shriram Transport will be desisted and become a 100% subsidiary of IDFC.

Where are the synergies?

To be fair, there are synergies to both parties in the deal. Shriram group has a huge loan book in excess of Rs.100,000 crore but does not have the balance sheet strength on its own. From that perspective,the merger with IDFC will give Shriram the requisite balance sheet soundness to expand its business. For IDFC Bank, this is the best bet to build their loan book by acquiring the 10 million clients of Shriram Group in one go. Since the focus of IDFC Bank is more on digital banking, the client acquisition and management costs will be substantially lower.

But,challenges remain!

The deal is going to vulnerable to a lot of practical challenges.Firstly, there is going to be a culture misfit between the two organizations. How it is managed remains to be seen. Secondly,Shriram has exposure to life and general insurance and hence apart from RBI and SEBI, the approval of IRDA will also be required.Thirdly, Shriram also has exposure to the chits and other investment businesses, which will now have a stake in IDFC Bank after the merger. It remains to be seen how the RBI reacts to it. But the big challenge could be explaining the presence of Ajay Piramal as a shareholder of IDFC Bank considering that RBI is averse to mixing banking and corporate. Explaining that could be the real challenge!©

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