Companies & Sectors
Wipro and Infosys will shine, predicts Espirito Santo Securities

The institutional research firm picks Wipro to finish first, followed by Infosys, as it expects industry dynamics to improve in FY13-14. The Economist, however, doesn’t foresee a good future for the Indian IT industry

Espirito Santo Securities (ESS) believes that the information technology (IT) industry will turn the corner in FY13-14 as clients’ discretionary spending is expected to increase with companies’ enhanced performance. Furthermore, the improved outlook of the United States economy is expected to result in increased order inflow to India. The report said, ‘The three distinct positive comments/observations that came out post the results were: discretionary spending is picking up, FY13-14 is looking better than FY12-13 and almost all companies have increased realisation and reported better-than-expected margins’. This is despite the fact that IT budgets continue to be under pressure and are likely to be slashed. But the argument ESS puts forth is that incremental revenues will pour in from small discretionary spends.

To see our analysis on earlier ESS reports, click here.

However, we are skeptical of Indian IT industry of doing well because the focus of the re-elected American president is it to increase more American onshore jobs. There is talk of bringing some outsourcing jobs back to American shores and this could hurt the Indian IT industry in general. It is not yet known whether the impact will be felt in FY13-14 and how big it will be, but it will surely arrive. In fact, countries like Philippines and Vietnam already have a cost advantage over India, in terms of wage differentials. The Economist even carried a special section on Indian outsourcing (issue dated 19th-25th January) which states that some of the biggest outsourcers, for instance General Electric and General Motors, have already brought back some IT jobs back to American shores. The Indian IT industry has every reason to worry about this trend, especially with president Obama at the helm for another four years. The impact may not be felt in FY13-14, though. One factor that may buoy the industry is the rupee-dollar equation as Indian economy is still weak. But this is an external factor and subject to speculation.

One of the biggest beneficiaries has been Wipro, according to ESS, which believes the company to be worth Rs475 per share. Wipro, which has often (perhaps unfairly) been compared to Infosys, has recouped much of the valuation as its realisations have dramatically improved. According to ESS’s report, ‘Wipro’s margins have increased with improvement in realisations and will be sustainable with increased efficiencies. One quarter of strong volume growth will have a magnified impact on margins’. The report further said, ‘Wipro has invested over the past year to differentiate the front-end (sales) and standardise the back-end (delivery). The benefits of these are already visible in the form of improving deal traction and revenue productivity’.

ESS believes that HCL Technologies will be one of the Tier-1 IT stocks to look out for because of change in leadership which will happen in July 2013, when Vineet Nayar steps down as CEO. This is a significant event as Nayar has been associated with HCL Technologies since 2005, which is a long time.

Furthermore, the report said, ”While the margin expansion has been commendable, we believe HCL Technologies will have to reinvest in the business in light of the increasing competitive intensity in the restructuring market and the company’s expectations of a weakness in discretionary spends”. While HCL Technologies believes that discretionary spending in its portfolio is a concern, we feel that it is also a concern for the industry as a whole. ESS believes that HCL Technologies is worth Rs748 per share.

ESS is neutral on Tata Consultancy Services and pegged its value at Rs1,450 per share.


Is it still too much to expect bonus shares from public sector banks?

The finance ministry and RBI should quickly lay down guidelines for banks to issue bonus shares, and also raise the FII limit to 30% for investment in PSBs, which will not only be another dose of reforms, but greatly assist the PSBs in raising fresh capital from the market

The Parliament, in its last session, passed the Banking Laws (Amendment) Act, 2012, which allows nationalised banks to issue bonus shares. However, in the absence of clear-cut guidelines either from the finance ministry or Reserve Bank of India (RBI), public sector banks (PSBs) have refrained from issuing bonus shares to its stakeholders.


The ministry and RBI should also raise the financial institutional investment (FII) limit in PSBs to 30% from 20% currently, which would help banks to raise fresh, additional capital to meet the Basel III norms.


Background of government ownership of banks:

State Bank of India (SBI) was set up on 1 July 1955 by an Act of Parliament, namely State Bank of India Act, 1955, by which SBI took over the former Imperial Bank of India. In 1960, seven former state associated banks became SBI’s subsidiaries and thus eight banks were under the banner of the SBI group. Of these seven subsidiaries, two banks, namely State Bank of Indore and State Bank of Hyderabad, were recently merged with SBI, and as of now there are only six banks, including five subsidiaries, functioning under the SBI group.


The next wave of nationalisation took place in July 1969, when the country’s 14 top private banks were nationalised. Six more banks were nationalised in April 1980. Out of these six, New Bank of India was merged with Punjab National Bank in 1993, leaving only 19 nationalised banks functioning as PSBs, where majority ownership rests with the central government. There is one more bank under public ownership, namely IDBI Bank, which started as Industrial Development Bank of India. IDBI Bank bean as a fully government owned term-lending institution, but was converted into a full-fledged commercial bank and re-christened IDBI Bank. In short, there are now 26 PSBs controlling more than 70% of the total banking business in the country.


Listing of public sector banks in the stock exchanges:

SBI was the first PSB to tap the stock market in December 1993, when it offered equity to the general public. Subsequently, all PSBs, barring two subsidiaries of SBI, came out with public issues and offered shares to the public over the past 10 years. Consequent to the public offering, these 24 PSBs are listed on stock exchanges.


But these PSBs have not been favoured by investors for various reasons. All of them except SBI are quoted in single-digit price earning multiples on the stock market. Though they are considered strong banks, as majority ownership rests with the central government, their valuations are low in the bourses as is the case with most PSBs. This is because these banks, since their nationalisation, have not rewarded the shareholders, except with annual dividends at pay out ratios, prescribed by the RBI. As these banks do not come under the Companies Act, 1956, they were not able to issue bonus shares as per the said Act. Though all these banks have substantial reserves in their balance sheets, there was no provision to issue bonus shares in the enactments through which they were nationalised.


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Amendments affected to their Acts to provide for bonus shares:

The State Bank of India (Amendment) Act, 2010, passed in 2010, provided for SBI to issue bonus shares, and the recent enactment, The Banking Laws (Amendment) Act, 2012, passed in the last session of Parliament has provided for issue of bonus shares by the nationalised banks. Now that the decks have been cleared by these Acts, we can certainly expect these PSBs to consider issuing bonus shares as this will provide a boost to their market image and will help them to raise additional capital required to meet the regulatory norms under Basel III over the next couple of years.


Why issue bonus shares?

Issuing bonus shares does not in any way improve the financial position of a company, as there will not be any inflow of cash into the coffers of the company. But it helps improve the image of the company, as giving free shares is considered a reward to shareholders. The stock markets always welcome the issue of bonus shares as it is considered an investor-friendly measure, which will help the company raise fresh equity through the capital market in due course.


The issue of bonus shares is a way to provide a larger number of shares to the market as the free-float in the market increases in the same ratio as the issue of bonus shares. Besides, the prices come down proportionately. Hence, these shares might appear affordable and attract the attention of small investors, thereby widening the investor base of the company. Besides, the issue of bonus shares is an indication that the management is confident of servicing a larger capital arising out of the bonus issue. However, there is no obligation on the part of the company to pay the same percentage of dividend on the increased capital.


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Guidelines for issue of bonus shares:

While Securities & Exchange Board of India (SEBI) has issued detailed guidelines for issue of bonus shares by listed companies, the most important one is that which specifies that the bonus shares shall be issued only out of free reserves built out of genuine profits, or share premium collected in cash only. The reserves created by revaluation of fixed assets should not be used for this purpose. There are a number of other conditions stipulated by SEBI, which are in the interest of the shareholders and must be complied with before bonus shares are issued.


However, the Department of Public Enterprises (DPE) of the ministry of heavy industries & public enterprises of the Government of India has its own guidelines for issue of bonus shares by public sector undertakings (PSUs; except public sector banks). This department of the central government has been guiding the PSUs under its control to capitalise their reserves and issue bonus shares. This is because the biggest beneficiary of such an issue will be the central government, by virtue of its majority holding in all these companies.


One criteria specified by the DPE is that PSUs with reserves in excess of three times their paid-up capital should consider issuing bonus shares to shareholders. And in deference to these instructions, most PSUs (except banks, which come under the control of the finance ministry) have issued bonus shares in various ratios over the past five years. Even as late as 25 November 2011, the DPE reiterated these instructions, as it felt that “holding huge reserves does not reflect equitable capital base of the company, and these companies declare dividend on a lower capital base”.


FAQs on Primary Markets - Issues by Indian Companies in India by SEBI


Details of free reserves held by PSBs as on 31 March 2012:

All the public sector banks have large reserves and are comfortably placed to issue bonus shares, though the level of reserves vary depending upon their past performance on the profitability front.  The following table shows the extent of free reserves held by the 24 listed PSBs. The free reserves are clearly in excess of three times their paid up capital, the level stipulated by the central government for PSUs.

Most of these banks have improved their performance on the profitability front over the years through better management of their assets and liabilities. However, the RBI is concerned about the growing non-performing assets of these banks. It is a deterrent for issuing bonus shares liberally in the context of uncertain economic conditions prevailing in our country at present.


Increase FII investment limit from 20% to 30% in PSBs:

However, there is a dire need to create an investor-friendly image for PSBs and thus, improve their valuations on the bourses to enable these banks raise additional capital from the market to meet their capital adequacy requirements under Basel III norms. To achieve this, PSBs should not only be allowed to issue bonus shares, but the present cap of 20% for investment by FIIs in PSBs should be proportionately increased to at least 30%, in tune with the recent increase in the voting rights to 10%.


Read other articles by Gurpur.


(The author is a banking professional writing for Moneylife under the pen name ‘Gurpur’)



nagesh kini

5 years ago

The fact that PSU bank public issues are lapped up so eagerly by the small investors and the extremely high valuations indicates the confidence in them.
The MOF must encourage them to come out with Bonus issues out of their bulging reserves to reward them and come out with higher dividends.
In the disinvestment or capitalization process there ought to be primacy for a larger number/quota going up to 50% for small Indian investors over FIIs and other preferential allotees, to make them really Indian investor friendly.

nagesh kini

5 years ago

The fact that PSU bank public issues are lapped up so eagerly by the small investors and the extremely high valuations indicates the confidence in them.
The MOF must encourage them to come out with Bonus issues out of their bulging reserves to reward them and come out with higher dividends.
In the disinvestment or capitalization process there ought to be primacy for a larger number/quota going up to 50% for small Indian investors over FIIs and other preferential allotees, to make them really Indian investor friendly.

No transaction fee should be levied on air passengers: SC

The apex court also directed DGCA to examine the tariff structure of the airlines in view of their wide range of base prices for air tickets


New Delhi: Passengers who book air tickets through agents will not have to fork out extra money with the Supreme Court on Wednesday restraining airlines from levying transaction fee in any form on them, reports PTI.


“The transaction fee shall not be collected from any passenger in any form or under any other name,” a bench of justices DK Jain and Madan B Lokur said.


The apex court also directed the Directorate General of Civil Aviation (DGCA) to examine the tariff structure of the airlines in view of their wide range of base prices for air tickets.


“There are several bands for fixing the base price which in certain cases range from Rs1,120 to Rs36,000...We are of prima facie view that regarding wide range of basic fair, it would be necessary for the DGCA to examine the tariff structure of the airlines,” the bench said.


The bench rapped the DGCA for not enforcing its own direction dated 17 December 2012 when it had restrained the airlines from charging transaction fee from passengers.


“We regret to note that despite provision is there not to charge transaction fee, the DGCA failed to enforce its own direction,” the bench said, adding “It needs our immediate intervention for non-compliance of direction issued by the DGCA. The airlines cannot charge transaction fee from customers.”


“We are of the view that circular of DGCA dates 17 December 2012 is still in vogue and transaction fee cannot be charged by the airlines,” the bench said.


Transaction fee was introduced by the airlines after they adopted a zero commission policy for their agents. Under transaction fee, agents charge customers any amount of their choice and there is no uniformity in it.


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