US-based Cognizant Technology Solutions Corp., which competes with home-grown majors Tata Consulting Services Ltd (TCS) and Infosys Technologies Ltd for software offshoring work, has consistently grown at higher rates than its Indian counterparts.
The latest June quarter was no different. Cognizant’s revenue grew by 53% on a year-on-year basis, which, according to the company, is the 19th successive quarter it has grown revenue by over 50%. Among its competition, TCS was next with dollar revenue growth of 42%; Infosys and Satyam Computers Ltd followed with 40.6% and 40.3% respectively. Similarly, Cognizant’s operating profit growth of 49.5% was the highest among large-sized offshoring firms.
Why does Cognizant do better than its peers? The company says that since it is based in the US, where a majority of its clients are, its client relationships are much stronger. A majority of the company’s executive team and practice leaders are based in the US, which leads to better access to clients. Says R. Chandrasekaran, president and managing director: “Cognizant presents clients the best of ability by investing in senior people adequately and by backing that up with delivery and execution.”
But some of Cognizant’s operating metrics don’t look too impressive when compared with its Indian counterparts.
Its operating margin of 18% is even lower than Satyam’s and far lower than Infosys’ margin of 25%. This is because it operates at much lower utilization rates and with much higher selling, general and administration (SG&A) expenses. The company has maintained its SG&A spend at around 24% of revenues, which is much higher than Infosys’s spend of 14%. The higher budget is to invest in hiring locals as well as senior executives for the sales function in the markets where its clients are based. The lower utilization (both onsite and offshore) ensures that the company doesn’t have to reject client orders for want of people. Both the above factors, while they depress margins, enable the company to post superior growth year after year. In fact, Cognizant calls its higher SG&A spend an investment for future growth. The growth numbers in the past five years clearly demonstrate this. The markets too seem to be happy paying higher valuations for Cognizant for its superior growth. The stock is listed on Nasdaq and trades at 36 times forward earnings, over 40% higher than Infy’s price-earnings multiple of 25 times forward earnings.
Ballarpur Industries Ltd (Bilt) has planned a smart restructuring move that would improve the lot of its shareholders considerably. The restructuring is being done through a complex yet innovative transaction, which increases the valuation of the company’s pulp and paper manufacturing facilities in India on the one hand, and reduces debt and equity capital in the company’s books on the other.
The company will transfer ownership of three of its six manufacturing facilities in India to Ballarpur Paper Holdings, a Netherlands-based subsidiary company in which Bilt has an 80% stake.
The company already holds Sabah Forest Industries Malaysia, its recent overseas acquisition, via Ballarpur Paper.
Ballarpur Paper will fund the purchase of the three units by diluting equity to private equity investors, as well as by raising debt. The three Indian units and Sabah are integrated pulp and paper manufacturing units, which would get a better valuation overseas than in India. The enterprise value of companies with such facilities is typically eight to nine times Ebitda (earnings before interest, tax, depreciation and amortization) in overseas markets, against about six times in India. The transfer, therefore, will effectively result in better valuations for Bilt’s commodity paper business.
More importantly, Bilt plans to use the proceeds from the transfer to retire debt worth Rs1,000 crore and buy back shares worth about Rs950 crore. The debt on the company’s books will reduce by about 70%, and its equity capital by 40%. Once the transaction is complete, earnings per share and return ratios of the remaining businesses of Bilt will improve considerably. Further, Bilt will continue to hold a majority stake in Ballarpur Paper (78% if it offers 20% stake of Ballarpur Paper to private equity investors). Over and above that, shareholders would have got back 40% of the current market value of their investment in Bilt through the buyback. The markets took some time to understand the net result of the restructuring, but after they did, the stock has risen about 10%.
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