The Financial Times reported on Tuesday that BT Group Plc. is considering the sale of its 31% stake in Tech Mahindra Ltd, since the holding doesn’t fit its long-term strategy. The Indian IT firm’s president of international operations, C.P. Gurnani, told CNBC-TV18, “It’s nothing that I am aware of and is definitely not on the cards.”
BT itself hasn’t denied the report, saying it regularly reviews its global operations and investments. If the sale were on the cards, one good outcome would be that BT’s competitors would be more comfortable dealing with Tech Mahindra.
Currently, the British firm accounts for about 65% of Tech Mahindra’s revenues. Analysts say that coupled with its high equity ownership, this leads to worries among other customers about engaging with Tech Mahindra, especially when it comes to projects where critical information is involved. Since Tech Mahindra specializes in the telecom space, some potential customers would be competing with BT.
The high dependence on BT has been among the main concerns analysts have had about the stock. Most analysts are convinced that BT enjoys lower billing rates, which is why it sources much of its technology services needs to Tech Mahindra. Interestingly, this doesn’t show up in the company’s margins. The Indian IT firm’s pre-tax margins of about 20% are comparable with peers of similar size. But, because the company has a large captive client, it doesn’t spend as much as peers on selling and marketing expenses.
If BT is no longer a shareholder, revenues from other customers can be expected to grow at a faster pace. But there’s also the possibility that business from BT may not be assured if it is no longer a shareholder.
For now, after having won some multi-million dollar, multi-year deals from BT, the transition, if any, can be smooth. But in the future, much will depend on the terms of BT’s separation (as a shareholder). If the terms for awarding deals and pricing remain the same, the exit would be positive as not only would Tech Mahindra retain the BT part of the business, but would also be able to better attract other clients. But if business from BT will slow down, it will leave a void that would be difficult to fill.
The markets, however, didn’t attach much importance to the news — Tech Mahindra shares fell by 0.9% on Wednesday, in line with the fall in the markets.
Expect cuts in growth targets as capital goods cos face headwinds
Industry leaders have told the finance minister that high interest rates could take their toll on investment. As this column had pointed out a while back, the contribution of investment demand to the growth in gross domestic product (GDP) peaked in 2005-06 and its place has been taken by consumption growth, according to data from the Prime Minister’s economic advisory council (EAC). Moreover, the EAC believes that, of the 7.7% growth that it envisages for 2008-09, consumption will contribute 5.09 percentage points, while total investment demand (including inventories) will contribute just 3.62 percentage points.
Surprisingly, the banking data seems to show that credit to the infrastructure sector is picking up, as a percentage of non-food credit and, conversely, personal loans are going down as a proportion of non-food credit. Here are some figures: on 23 June 2006, personal loans constituted 27.33% of total non-food credit outstanding, while credit to the infrastructure sector was 7.57%. Some 11 months later, on 25 May 2007, the share of personal loans fell to 25.99%, while that of infrastructure loans went up to 8.19%. On 15 February, personal loans accounted for 24.45% of non-food credit, while the share of infrastructure loans was 9.13%. And the latest data show that, on 23 May, personal loans accounted for a much lower 24.28% of non-food credit outstanding, while loans to infrastructure accounted for 9.35%.
So, if both the EAC and the Reserve Bank data are correct, that means the share of consumption spending is rising, but it’s not dependent on personal borrowing, which is decelerating. Meanwhile, in spite of the rising share of infrastructure loans, the share of investment demand is coming down. That’s probably because other sources of funding, such as external commercial borrowings and stock markets, are no longer an easy source.
This hasn’t prevented EAC from assuming the investment rate for 2008-09 will be 37.5% of GDP, despite the savings rate being much lower at 34.5% of GDP, compared to 36.2% in 2007-08. Morgan Stanley economist Chetan Ahya says it’s more likely to fall to 35.6% in 2008-09 and to 32% in 2009-10.
According to a research note by Deutsche Bank, first quarter results suggest serious cash crunch problems for most capital goods players. “Interest cost as a percentage of Ebit (earnings before interest and tax) seems to have risen by 30-40%.” Larsen and Toubro Ltd’s plan to seek shareholder approval for raising Rs2400 crore through a placement with qualified institutional buyers is also a sign of things to come, it says. “In our view, companies could cut their targets for growth sooner rather than later.”
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