Companies & Sectors
Indian IT companies may not venture into new areas, says Nomura
Investments in new themes including social, mobile, analytics and cloud (SMAC) are likely to be from multinational IT companies, concludes Nomura Equity Research
 
Near-term focus in the information technology (IT) sector in Nomura’s view is likely to remain more towards traditional spend areas across Indian IT companies aimed at geographical expansion and greater depth in industry solutions, rather than emerging areas of spend where MNCs (multi-national corporations) are focusing on.
 
Emerging spend areas like digital marketing, mobile, analytics and cloud are buzzwords we hear often from Indian IT, but the focus of their acquisitions has predominantly been in traditional spend areas (75% of acquisitions in these spaces). This, in Nomura’s view, could be because of greater focus on competency building (through adding service lines or industry capabilities) or on geographical expansion in continental Europe (France/Germany). On the contrary, the focus of acquisitions for MNCs has been more towards emerging spend areas (70% of acquisitions). 
 
Investments in new themes including social, mobile, analytics and cloud (SMAC) are likely to be from multinational IT companies, concludes Nomura Equity Research.
 
The forecast for major Indian IT companies is given in the table below:
 
 
The historical data for acquisitions in the IT sector is shown in the table below: (acquisitions by Indian companies are smaller).
 
If we were to go into the nature of acquisitions by Indian IT companies, one would notice that acquisitions have been focussed on industry solutions, geography expansion or to augment consulting capabilities. This is shown in the table below:
 

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RBI’s moves worsen market’s macro ecosystem
Nomura expects some downside risk to its March 2014 target of 21,700 at this time as any negative move in interest rates will be cause for the market multiple coming off
 
The dislocation of global markets since 22 May on fears of the US Federal Reserve’s (Fed) QE taper has resulted in a sharp increase in volatility in emerging market currencies, the rupee included. In India’s case, the global unwinding of carry trades in emerging markets has manifested itself as record selling of FII debt holdings and has in large part contributed to more than 7% depreciation of the rupee against the US dollar.
 
In the context of narrowing rate differentials for India—with US interest rates rising on lower bond purchases implied by Fed’s taper and potential end to the regime of ultra-low short-term interest rates—the RBI’s (Reserve Bank of India) latest attempt is aimed at arresting this contraction in rate differentials, which hitherto had been driven by higher US interest rates. More specifically, the RBI has attempted to shift upwards the interest rate structure in India through:
 
Price control through floor on the penal borrowing rate: The marginal standing facility (MSF) rate has been raised to 10.25% or 300bps above the repo rate. The MSF rate is the penal borrowing rate for those banks that seek overnight liquidity from the RBI in excess of what they can pledge through SLR securities.
 
Quantity control through rationing of bank reserves: The RBI will supply inter-bank liquidity through its LAF window only up to Rs750 billion or 1.0% of net deposits in the banking system. If commercial banks collectively need more than Rs750 billion in liquidity, then they will have to borrow in the call money market or borrow from the RBI at the higher MSF rate.
 
These measures are aimed at addressing exchange rate volatility, but have wider implications for the market’s macro ecosystem.
 
The central bank is the monopoly supplier of interbank liquidity. Limiting the quantity of funds it stands to allocate to commercial banks through the overnight LAF window—as an aside, this move is somewhat similar to what the Chinese central bank did recently, although for reasons entirely different—will raise the cost of borrowing in the interbank call money market, says Nomura Equity Research in its Quick Note. The transmission of higher short-term rates will raise the cost of funding for the wider banking sector, which then will potentially be transmitted to the wider economy as higher overall interest rates, the brokerage added.
 
“Within banks, this move will be especially negative for (smaller) banks which are short of liquidity and for non-bank finance companies that are largely wholesale funded. Further, higher interest rates amidst an ongoing growth slowdown will also put incremental pressure on asset quality of banks, more relevant for public sector banks,” said Nomura.
 
“Higher interest rates are also negative for leveraged consumption, mostly of the discretionary variety—autos and real estate are key sectors that stand to lose, the brokerage believes. Demand for bank credit from the wider industry has been weakening for more than two years now as the economic slowdown has taken a firmer hold. But higher rates dissuade the marginal borrower (negative for incremental growth) and put more stress on the balance sheets of companies in sectors like infrastructure, which have been at the heart of the current slowdown.
 
Nomura believes that in the medium-term higher real interest rates should incentivise savings, and could trigger a reallocation of household savings away from gold and into bank deposits.
 
From the market’s perspective, the RBI’s move signals a reversal of its easing bias. The impact on growth, already impaired by the significant investment slowdown, will be further negative. Sector-wise, this change of monetary policy stance suggests further outperformance of defensives while industrials and domestic growth cyclicals will likely continue to underperform, says Nomura.
 
The question to ask over the longer term is: What happens when growth aggregates worsen further? Nomura reckons that India’s problems of elevated CAD and high inflation were already on a healing path carved out by the economic slowdown. The RBI’s announcements are meant to address a capital account problem than a current account one. Therefore, were CAD to continue to normalise and inflation continue its downward journey, will the RBI move back to a more accommodative stance? The RBI’s measures are meant to address a pressing need triggered by external and largely exogenous factors, but in the process market conviction stands broken, says Nomura.
 
Nomura expects some downside risk to its March 2014 target of 21,700 at this time as any negative move in interest rates will be cause for the market multiple coming off.

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Oil and gas problems: India must grab opportunities in Iran and Iraq
Western bullying has not really helped but sanctions have caused serious economic hardship to Iran. No progress was made in new projects for many years due to the difficult conditions in Iraq. India must look for opportunities in both the countries in oil and natural gas
 

India imports 184 million tonnes (MT) of crude of which 13%, or to 24 MT came from Iraq in 2012-13. In the same period, Iran supplied 13.3 MT, as against 18.1 MT in 2011-12, due to the sanctions imposed by the US and the European Union.
 
These sanctions were imposed primarily to force Iran to halt its nuclear programme, which Iran has stated, time and again, that it is in the interest of the country and only for peaceful purposes. It has managed to dodge various UN resolutions and has not had full inspection by UN/AEC, etc. Western bullying has not really helped but sanctions have caused serious economic hardship to the country.
 
In the case of Iraq, way back in 2000, during Saddam Hussein’s regime, ONGC Videsh became the sole licensee for block No 8, a large on-land block in the western desert, which became effective in May 2001, but no progress was made thereafter due to the difficult conditions in the country.
 
After the invasion and overthrow of Saddam Hussein and the limping back to normalcy in 2008, ONGC Videsh continued its work under the new gas and oil law; and the block No. 8 is now estimated to hold 645 million barrels of reserves, out of which 9% (about 54 million barrels) are likely to be recovered. The actual production may vary—lower or even higher than the present estimates.
 
Meanwhile, Iraq has also offered three new blocks, in the Middle Furat oilfields, where oil has been discovered, on a nomination basis. At the moment, no details are available on the estimated reserves or the type of crude from exploratory holes drilled at the site.
 
Iraq has also expressed interest in the Paradip refinery proposed to be set up by Indian Oil Corporation (IOC) in Odisha.
 
All these were stated by petroleum and natural gas minister Veerappa Moily.  He felt that in view of the generous offer, work can start immediately as no time would be really be spent in exploration that is normally associated in this industry.
 
The petroleum minister should now move on this issue immediately and no time should be lost in accepting the offer and commence work. 
 
In the case of Iran, all the three companies involved, viz, Oil India, ONGC Videsh and IOC, have shown keen interest to accept the proposed offer of production sharing contracts, whereby a 15% fixed return under the buy-back arrangement with national oil company of
Iran.
 
The only stumbling block is the US and European Union's sanctions against Iran which primarily targets the Iranian oil industry. Presumably, to overcome this impasse and technical snag, Iran oil minister Rostam Qaseme has offered to ship the gas to Sultanate of Oman in liquefied form where it can be processed into LNG which can then be shipped directly to India!
 
At the same time, Indian firms’ interest to develop the gas fields in Farzad B, where the initial estimates have shown recoverable reserves of 12.8 trillion cubic feet must be followed up seriously by the Indian oil ministry so that contracts can be signed and spadework initiated at the site.
 
These developments are encouraging, and it now remains to be seen how seriously and effectively the government works on the offers received.
 
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.) 

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