IGate: a high price for delisting

IGate: a high price for delisting
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First Published: Wed, Oct 10 2007. 11 54 PM IST
Updated: Wed, Oct 10 2007. 11 54 PM IST
Plans of iGate Corp. to delist its Indian subsidiary, iGate Global Solutions Ltd (IGS), may prove to be a costly affair, considering the impressive results the Indian business has been reporting lately. IGS has been operating under adverse circumstances—on the one hand, the rupee appreciation has eroded revenues and profit, and on the other, the company’s relatively high exposure to the mortgage segment in the US market has impacted growth.
Yet, the company managed to grow earnings by 16 times on a y-o-y basis in the June quarter, and has followed that up with a 127% jump in earnings in the September quarter. Much of the incremental earnings came from margin improvement. Profit before tax and exceptionals grew by Rs14.5 crore y-o-y, 80% of which came from an increase in core operating profit. This is commendable since the rupee appreciation and the subprime impact led to a drop in revenues. The balance 20% of the incremental profit came from hedging gains and higher financial income.
IGS used to operate on margins of less than 10% last year, but last quarter, operating margin improved to nearly 16%. Note that the company had set a target of 15% operating margin at the end of the last financial year, which it has already surpassed, thanks to an increase in the offshore proportion of its work and higher employee utilization.
But some of the margin improvement lately has come on the back on aggressive cuts on selling, general and administrative (SG&A) expenses, which fell by 7% last quarter over the June quarter. Concurrently, new client addition has been rather low—the company added just three clients last quarter. Analysts say that once SG&A spend reverts to the mean, margins could taper a bit.
But IGS investors who tender their shares through the reverse book-building process are likely to focus on the September quarter numbers. Earnings per share last quarter stood at Rs7.25, which on an annualized basis works out to Rs29. At a price-earnings multiple of 15 times, the expected price would work out to Rs435, which represents a premium of over 35% to the traded price prior to the de-listing announcement.
Of course, the final price could be even higher, since it will depend on the price quoted by minority shareholders in the reverse book-building process. And the way earnings have grown in the past couple of quarters, it does look like shareholders will be able to extract their pound of flesh.
The opportunity before Power Finance Corp. (PFC) was aptly summed up by its chairman and managing director, V.K. Garg, when he pointed out that, with around 80,000MW of capacity planned in the 11th Plan and with every megawatt costing about Rs4 crore, it’s crystal clear that a huge amount of money is needed for the power sector. Further, with equipment orders for 52,000MW of capacity already placed, this time the government is sincere about meeting its targets.
That opportunity is also seen in the 76% rise in sanctions by PFC in the first half of the year. Disbursements have grown at a much lower 9%, but that’s because disbursements are dependent on previous sanctions, while the rise in sanctions is an indication of the company’s growth horizon.
Quarter-on-quarter comparisons in this sector are unfair, because one single project can skew disbursements. Nevertheless, PFC’s net profit for the second quarter is up 22.5% to Rs282.22 crore compared with the year-ago period. At the profits before tax level, growth has been even better, with profit before tax rising 25.2% to Rs420 crore. Furthermore, this growth has occurred in spite of an exchange loss in the quarter, compared with an exchange gain in the year ago period.
The company has very commendably been able to increase both its net interest margin and the spread between its borrowing and lending costs. Net interest margin, which was at 3.67% in the first quarter, improved further to 3.76% in the second quarter. Similarly, the spread widened from 1.93% in the first quarter to 2.04% in the second quarter. And that happened despite the company’s cost of funds going up from 7.29% in the first quarter to 7.88% in the second quarter. With a large amount of PFC’s loan assets coming up for interest rate resets, the company is well positioned to offset the impact of higher interest rates. Gross non-performing assets are down to a mere 0.06%.
Among other initiatives, apart from advisory services, the company’s plans to pick up equity stakes in other central power undertakings are bearing fruit, with the Rs4 crore worth of equity in picked up in the Power Grid Corp. India Ltd initial public offering already giving handsome returns. With strong demand and an ability to manage margins, the firm has good times ahead of it.
Write to us atmarktomarket@livemint.com
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First Published: Wed, Oct 10 2007. 11 54 PM IST