Companies & Sectors
Infosys’ acquisition of Lodestone is expensive and would be neutral to the stock, says Nomura

The acquisition will lead to an increase of 1.3%/2.7% to the FY13/FY14 revenue numbers for Infosys at disclosed revenue run rates while EPS impact is likely to be marginal, says Nomura

Infosys has agreed to acquire Lodestone—a management consultancy firm based in Zurich—for an aggregate enterprise value of CHF330 million ($345 million) in cash. Lodestone will operate as a subsidiary of Infosys named ‘Infosys Lodestone’ in Europe, according to an Infosys’ press release. BG Srinivas, head of Europe and global head of financial services and insurance, will be the chairman and Ronald Hafner (present CEO of Lodestone) will continue as CEO of the subsidiary, according to Infosys. The transaction will be effective October-end, post anti-trust clearance. Infosys will pay two-thirds of the consideration upfront, with the balance one-third to be paid after three years subject to certain conditions (undisclosed by company).

 

The positives for Infosys from the acquisition of Lodestone include: (a) It will strengthen Infosys’ consulting presence in Europe. Lodestone generates 83% revenue from Europe. Infosys on the other hand has only 10% revenue from continental Europe. (b) It will increase life-sciences contribution. Infosys has only a small presence in life-sciences vertical (3.7% of revenue or $260 million annualized run-rate). Lodestone generates 28% of revenue from life sciences ($60 million). (c) It will increase Infosys’ presence in CSI. The Lodestone acquisition will lead to Infosys having over $1 billion revenues annually from SAP-led offerings. Infosys currently has 31,000 people in consulting and systems integration (CSI) which includes 10,000 SAP consultants.

 

Lodestone advises clients on strategy and process optimization and provides business transformation solutions enabled by SAP. It has more than 200 clients across industries with a vertical mix of 28% revenues from life sciences, 17% from industrial manufacturing, 16% from auto and14% from consumer goods. It had FY11 revenues of CHF207 million ($220 million). It has over 850 employees including 750 consultants. It has had 18% revenue growth from FY09-11. It has 83% revenue from Europe (50% of total revenue from Switzerland, 23% of total revenue from Germany); 12% from APAC.

 

Nomura Equity Research views the acquisition to be expensive and largely neutral to the stock. The acquisition will lead to an increase of 1.3%/2.7% to the FY13/FY14 revenue numbers for Infosys at disclosed revenue run rates. On margins, however, the acquisition is likely to be dilutive to the extent of 30-50 basis points (bps) over the next two years. EPS impact is likely to be marginal, added Nomura.

 

While this acquisition does indicate increase in aggression at Infosys in terms of inorganic growth, Nomura expects the stock impact to be largely neutral as: (a) consulting continues to be soft in terms of demand, and (b) benefits are likely to be long-winded as results from cross-selling play out.

 

The concerns identified by Nomura include: (a) Infosys is losing market share in cost efficiency business, and (b) Infosys will have continued drag from higher discretionary exposure.

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Indian steel demand continues to be weak

‘With Indian domestic steel prices starting to come down and a slowdown apparent in Indian demand, steel companies seem to be focussing on exporting more,’ says Nomura Equity Research

Indian steel demand growth is estimated at 4% y-o-y (year-on-year) and it remained weak in August 2012 as per data released by Joint Plant Committee (JPC). With the moderation in the past two months, YTD (year-to-date) April-August 2012 demand growth has further narrowed to 6.9% y-o-y. The data has been made available to Moneylife by Nomura Equity Research.

 

According to Nomura Equity Research, net imports during August-2012 were down to just 199 KT (kilo tonnes) from a monthly run rate of 300 KT.  However, both imports and exports remain elevated. Total imports have increased to 763KT, while exports also jumped to 564KT. YTD net imports are at 1.5 million tonnes (compared to 464 KT in Apr-Aug 2011) and total imports at 3.3 million tonnes (versus 2.4 million tonnes in Apr-Aug 2011). Total exports are down y-o-y to 1.86 million tonnes from 1.94 million tonnes last year.

 

With Indian domestic steel prices starting to come down and a slowdown apparent in Indian demand, companies seem to be focussing on exporting more, observes Nomura. It further points out that India still remains a net importer of steel.

 

Indian domestic steel prices are now at a slight premium to Chinese export prices, according to Nomura. While Indian steel prices have come down by Rs1,000-1,500/tonne during the past month, a sharp fall in Chinese export prices means that Indian prices are now at a premium of 1%-2% to landed cost of imports.

 

Chinese export HR coil prices have now fallen to $510/tonne (from

$ 550/tonne last month) and domestic steel prices are at close to Rs38,500/tonne (including 12% excise). This means that Indian steel prices are at a premium to import parity, comments Nomura. There could be a further risk of Rs500-Rs1,000/tonne to Indian steel prices as per current global prices, Nomura points out.

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Exim Bank raises SGD250 million; sets new record pricing at 3.375%

The bond issue was priced at 3.375% given the huge demand and the 100% sovereign guarantee Exim offers

Mumbai: The Exim Bank has mopped up 250 million in Singapore dollars (SGD) at a coupon of 3.375%, the cheapest five-year money raised by any domestic institution so far, reports PTI quoting sources.

 

This is the second overseas debt raising by the bank in 40 days. On 1st August, it had sold $500 million bonds at a coupon of 4%, which were just 348 basis points above the US treasury's. The issue was over-subscribed by five times.

 

According to sources at the merchant bankers, the issue had a guidance pricing between 3.375% and 3.350%.

 

"But the issue was finally priced at 3.375% given the huge demand and the 100% sovereign guarantee Exim offers," a merchant banking source told PTI.

 

TCA Ranganathan, Chairman and Managing Director of Exim Bank could not be reached to independently confirm the bond sale.

 

"This was an excellent issuance by a sophisticated issuer like Exim Bank. Their inaugural five-year SGD 250 million bond was strongly subscribed by several regional asset managers and private banks resulting in tight pricing of 3.375% per annum, which, on a swapped basis is circa 5 bps per annum, tighter than trading levels of their recently issued five-year $bonds," Citi India head for capital markets origination Rajiv Nayar told PTI commenting on bond sale.

 

Over 50 investors participated in the programme with around 82% coming in from Singapore, around 14% from Hong Kong and around 4% from Europe, the source said.

 

Out of this, around 42% are banks, around 30% AMCs with private banks constituting around 28%, sources added.

 

The issue had a rating of Baa3 from Moody's and BBB- from S&P.

 

It can be noted that domestic banks have been on a fund raising spree since July, which was kicked by the nation's largest lender SBI mopping up $1.25-billion through a bond sale at 4.125% coupon or 375 bps over the US government bonds.

 

Since then, ICICI Bank, Axis Bank, IDBI Bank, IOB, Union Bank among others together raised over $3 billion from overseas bond sale.

 

Corporates waiting to mop up dollar funds are Jindal Steel & Power, and Power Finance Corp among others.

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