It is unlikely that the entire benefit from rupee depreciation will flow to margins in the IT services industry, since market share shifts remain the big growth driver says Nomura
HCL Technologies and Tech Mahindra have until now shown rupee depreciation benefits in margins. Since they do not have near-term pressure on margins, they are likely to continue to show higher benefits of rupee depreciation in margins, says Nomura Financial Advisory and Securities (India) Pvt Ltd in a research note on Indian IT services industry.
Nomura says, both HCL and Tech Mahindra, followed by Infosys and TCS, will be gainers from the rupee depreciation in the forex market.
“Rupee depreciation theoretically benefits margins of IT companies as a large proportion of costs are in rupees, while revenues are largely in foreign currency. The theoretical sensitivity of US dollar and Indian rupee to margins is about 30 basis points (bps) for every 1% depreciation in domestic currency and about 1.5% on earnings for every 1% rupee depreciation,” the research note said.
The impact of rupee depreciation on specific software companies is shown in the table below:
However, it is unlikely that the entire benefit from rupee depreciation will flow to margins in the IT services industry, since market share shifts still remain the big growth driver. Rupee depreciation benefits are likely to be used for better revenue growth rather than margin improvement, Nomura said.
For HCL Technologies, in addition to improvement of existing business profitability, there will be gains from over $3 billion of deals signed over the last three quarters when the rupee was between 54 and 59. These deals will thus be more profitable under current conditions. Nomura sees upside to HCL Technologies’ guidance of 18.5%-19% margins at US dollar- Indian rupee rates of 55.
For Tech Mahindra, with pricing at a discount to peers and no salary hikes until fourth quarter of FY14, Nomura sees no major near-term fall in margins. The company has guided to keeping EBITDA margins stable at about 21% levels, if the currency holds at near 60 levels and will likely see the margins exceed these targets, in Nomura’s view, if current US dollar- Indian rupee spot rate sustains. The only near-term tempering impact would be on account of $115 million worth of forex losses in the balance sheet, which could bloat given the rupee depreciation.
Following table shows the impact of rupee depreciation on earnings per share in the IT services industry for select companies:
Just 11 entities, including seven individuals have registered as investment advisor with SEBI since the advisor regulations came into force. Is it too early? Or does it vindicate Moneylife’s stand that this regulation is irrelevant given the structure of financial services business?
The much-touted investment advisory regulations from Securities and Exchange Board of India (SEBI) have failed to enthuse registration. A SEBI release on 28th August reminded market intermediaries of this new regulation possibly because only 11 entities, including four firms have registered as investment advisors. The reason is obvious. No financial advisor wants to earn a living only out of advisory fee. There is no market for it. In any case, the advisor regulation applies to just one product that SEBI regulates – mutual funds. It does not apply to insurance, a major source of mis-selling.
While bringing advisory regulations, a well-intentioned SEBI wanted to make a distinction between selling financial products and advising about them. In the first case, the seller (distributor) is working for himself and the financial services company because he is driven by commissions. He is not working for the investor, necessarily. It creates a conflict of interest when he is ‘advising’. In the second case, the advisor is acting for the investor. He is advising for a fee about the best choices. SEBI has asked everyone to make a choice between the two.
You cannot both sell for commission and also advise the investor. Well, may be it is too early, but given a choice, it appears that everybody would want to sell for commission and not advise for fee. This is simply because there is no market of investors seeking pure advice.
Interestingly, the Financial Planning Journal, published by the Financial Planing Standards Board of India (FPSB) has names of over 1,750 financial advisors. These people are from the most likely category to register with SEBI as investment advisor. However, there are only seven individuals, who though it proper to get themselves registered with SEBI.
While drawing up regulations, SEBI did not take into account the actual situation on the ground – average to poor mutual fund performance, quality of advice and mis-selling by large distributors and investors’ attitudes.
SEBI has also enshrined in the advisor regulations that investors have to be profiled for risk including age, investment details, income details, risk tolerance, liability and others. Will risk profiling ensure that the lead will not be passed on to those agents who would share their commissions with the advisor friends?
While removing the so-called conflict of interest in selling, SEBI has also created difficulties for the honest distributor. Considering the actual situation on the ground, a financial advisor asked, “What is a distributor supposed to do when customers ask for advice? Is he supposed to not help the customer? Or what does he do when the distributor knows that what the customers is asking for is an inferior product? Should he allow the customer to make the mistake?”
The line between advisors and distributors is thin. When Moneylife spoke to a smart and ethical distributor of financial products, he said, “I will not be a surprised if (these) so-called investment ‘advisors’ work closely with ‘agents’ wherein the agents would give a pass-back of the commissions they earn to advisors who recommend customers to them. This currently happens as well, but it is more open as there is no restriction, where financial planners have tied up with agents of certain companies. Though the commissions are not disclosed, they earn enough for passing on a lead to an agent.”
What is happening in reality is that distributors sell for commissions but they also advice because customers ask for advice and without some advice and handholding, no selling can happen, especially financial products.
Moreover, the only mainline investment product that comes under SEBI regulation is mutual funds. Issues related to other financial products will be dealt with the respective regulators. As such, there would be no single body regulating investment advisors.
Investment advisor regulations have been discussed on and off for the past five years. In 2007, the SEBI published a consultative paper on “Regulation of Investment Advisors”. In 2008, the D Swarup Committee re-examined the issue and submitted its report in 2009. The report was revolutionary in its thinking prescribing all financial products have to become “no load”. Opposition to this report was vociferous. After much heat and dust, including dharnas and morchas by a section, the report was buried deeply and quietly. In September 2011, SEBI published another concept paper on the regulation of investment advisors, which led to much debate. Then in September 2012, SEBI come out with the draft regulation on investment advisors in India. Finally, in January, the market regulator came up with its regulations to oversee financial advisors, which came into effect from April 2013.
In short, post-April, anyone who wanted to provide investment advice had to register with SEBI and follow the rules contained in the new regulations. However, in the first five months, as per SEBI data, only 11 entities, including four institutions and seven individuals found it worth registering. Even, the institutions who have registered may have done the registration just in case to avoid problems in the future.
Here is the list of entities registered with SEBI as investment advisors...
Facebook reached a $20 million settlement agreement in the US. Under the agreement, Facebook can still post users’ content in ads but will give users more control over how their content is used
Facebook users included in sponsored stories on the social networking site who filed claims will receive $15 each as part of a $20 million settlement agreement approved by a federal judge this week.
Under terms of the class action lawsuit settlement approved by U.S. District Court Judge Richard Seeborg Monday, Facebook payouts will also go to attorneys and organizations involved in consumer privacy issues.
The settlement stems from a class action lawsuit filed in California by five users in 2011 who said Facebook shared their “likes’’ of certain advertisers without their consent in the form of sponsored stories. Facebook earned about $73 million in profits from the sponsored stories, or 60 cents per user included in the ads, according to court papers.
Some advocates objected to the agreement, saying it didn’t go far enough to prevent Facebook from engaging in the same conduct in the future, still doesn’t have sufficient protections for minors, and doesn’t sufficiently award users.
Under the agreement, Facebook can still post users’ content in ads but will give users more control over how their content is used. Children have to opt out if they don’t want to be used in Facebook’s sponsored stories, instead of being automatically excluded as some consumer advocates had sought.
Judge Seeborg said the plaintiffs in the case faced a hurdle of proving harm from the sponsored stories. He wrote:
Going forward, operation of the Sponsored Stories program will be more transparent, and Facebook users will have a greater ability to see how and when their activities result in generation of Sponsored Stories, and to limit recurrences. The minor subclass, and parents of minors, will have further opt-out options. The injunctive relief, while not as robust as some would prefer, contributes to the conclusion that the settlement as a whole is fair, reasonable, and adequate.
Read more here about social networking sites and user content.