Shares of Infosys Technologies Ltd were firm on Wednesday, on a day when the CNX IT index fell by 1.3%. The markets were pleased that Infy was finally doing an acquisition after a gap of more than three-and-a-half years.
But Infy is still being careful with its chequebook. It has spent only $28 million (Rs112.6 crore), less than 2% of its cash reserve of $1.58 billion, in acquiring the captive BPO arm of Royal Philips Electronics. A majority of its cash, $1.55 billion, will continue to earn paltry returns of around 9%, against returns of around 78% on capital employed in operations. It’s only other acquisition, that of Expert Information Systems in December 2003, had cost $23 million. Further, with estimated annual revenues of around $32 million, the Philips contract will add less than 1% to Infy’s current revenues of $3.36 billion. (Philips BPO’s revenues are estimated based on a billing rate of $15/hour and an employee utilization of 75%.)
But despite its small size, analysts are gung-ho about the deal. The Philips deal in itself may not add substantially to Infy’s bottom line, but the resources acquired could aid growth in the finance and administration vertical. Take the case of Expert, which had revenues of just $35 million when Infy had acquired it. Based on the company’s latest June quarter results, its Australian subsidiary had an annual revenue run-rate of $142 million.
For the Philips BPO acquisition to succeed, it’s imperative that Infy leverages the acquired centres in Poland and Thailand to gain new clients. Philips’ revenue contribution of about $36 million a year for the next seven years is hardly exciting by itself. Besides, analysts say that margins of the firm are likely to be around 10%, much lower than Infy’s margins of about 20% for its BPO operations. Yet, the fact that Infy has finally made an acquisition would help near-term sentiment for the stock.
The question that Housing Development Finance Corp. Ltd’s (HDFC) June quarter result was supposed to answer was whether the rise in interest rates had affected demand for housing loans. The corollary was whether delinquencies were also increasing. Interest in HDFC’s results had been stoked by some banks showing a marked slowdown in retail loan growth as well as a rise in bad loans. Among housing finance companies, LIC Housing Finance Ltd’s gross non-performing assets, for example, jumped to 4%, compared with 2.6% at the end of the March quarter.
Seen in that light, HDFC has done well. It has kept up its record of growing its loan book by around 30%. Loan approvals and disbursements are both up 29% on a year-on-year basis. In the March quarter, the comparable figures were 30% and 27%, respectively. Non-performing loans, computed on the basis of loans being classified as bad as soon as they become 90 days overdue, have increased, moving up from 0.92% of advances at the end of March to 1.22% at the end of June. That’s lower than the year-ago level of 1.41%, but it’s an indication that defaults have started to increase. HDFC’s net interest income rose by a remarkable 40% compared to the year -go period and was the main reason for the 25.6% rise in profit after tax. At around Rs1,960, the stock trades at about 3 times its book value (post preferential allotment) adjusted for the gains in its investments. Needless to add, the company’s subsidiaries add considerably to the valuation.
With banks slowing down their lending to the housing sector, analysts expect HDFC’s market share to increase in the next quarters. The recent equity dilution will fatten margins and boost resources and HDFC is likely to continue to deliver steady growth. But it will do well to watch its asset quality.
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