The investment by ICICI Venture in Infomedia India Ltd has delivered stellar returns, disproportionately higher than the improvement in the financial status of the investee company.

ICICI Venture had bought a majority 69.99% stake for Rs141 crore towards the end of fiscal 2004. Infomedia then (in fiscal 2004) had annual sales of Rs125.9 crore and profit before tax and exceptional items of Rs11.1 crore. In the past 12 months until September, about three-and-a-half years since the acquisition, Infomedia’s consolidated revenues stand at Rs194.4 crore. But profit before tax and exceptional items has risen to just Rs14.9 crore, at a compounded annual growth rate (CAGR) of less than 10%.

But that hasn’t stopped ICICI Venture from getting top dollar from its investment. In May 2005, it offloaded 10% of its holding for Rs29.6 crore. In August 2006, Infomedia had a mandatory buyback programme, in which all shareholders including ICICI Venture participated. The private equity firm offloaded 20.2 lakh shares (12.6% of its original holding) for a consideration of Rs49.4 crore.

In this week’s deal with Television Eighteen India Ltd (TV18), ICICI Venture sold 78.9 lakh shares for Rs178 crore. Put together, it has sold 71.9% of its original holding at an average price of Rs223 per share—much higher than its purchase price of Rs88 per share.

The CAGR doesn’t seem too impressive at 26%, especially considering that the National Stock Exchange’s Nifty has delivered average annual returns of 38% in the past four years. But considering that Infomedia’s core earnings have grown by less than 10% a year since it took over, ICICI Venture would hardly be complaining. In addition, when it bought into Infomedia four years ago, the deal was part-funded through debt. The return on the equity component, therefore, would be higher than 26%. What’s more, ICICI Venture still retains 45 lakh Infomedia shares, which are valued at Rs100 crore, based on the price at which TV18 has bought in.

Infomedia shares corrected by 5% to Rs245 on Wednesday, after traders realized that the open offer price is likely to be lower than Rs240. Even at current levels, the company trades at 47 times trailing 12-month earnings. While the upcoming open offer will act as a floor for the company’s share price in the near-term, it’s imperative that TV18 brings about improvements in Infomedia’s financials for valuations to sustain later.

Fed cut & credit markets

The US Federal Reserve’s 25-basis-point rate cut led to a sell-off in most markets, with India being a notable exception. But perhaps the impact of the Fed’s actions needs to be seen from the point of view of the US and European credit markets rather than the stock market. That’s because the big danger to the US economy arises from the credit market and the primary goal of the central bank is to counter the credit crisis. So what has been the impact of the credit market to the US rate cuts? The Fed funds rate has been reduced by 100 basis points since the first cut on 18 September (as on Tuesday), but the impact on one-month US dollar London interbank offered rate (Libor) has been a much lower 60 basis points, with the inter-bank rate declining from 5.8% three months ago to 5.20%. On Tuesday, the 25-basis- point rate cut delivered a 3- basis-point cut in one-month Libor. The three-month US dollar Libor rate has seen a similar movement in the last three months. With many mortgages pegged to the three-month Libor rates, the rate cuts by the US Fed may not translate into gains for the housing sector, which is the crux of the problem.

In the UK too, the credit market has shrugged off the Bank of England’s rate cut, with three-month British pound Libor remaining a full percentage point above the lowered base rate. The one-month Euribor rate has reached a 61/2-year high.

The yield spread between emerging market bonds and US treasuries also widened, indicating a rise in aversion to risk. The risk of companies defaulting on their debt also rose with credit default swaps on the Markit crossover indices for the US and Europe rising on Tuesday and Wednesday respectively.

However, unlike the stock market, the spreads on these indices had increased only modestly at the time of writing, indicating that the credit market was not as disappointed with the Fed’s 25-basis-point rate cut.

That is also suggested by the fall in US Libor rates on Wednesday, the trigger probably being reports that the US Fed is considering ways and means to supply extra liquidity to the banks.

To cut a long story short, stock market investors would do well to take their cue from the conditions prevailing in the credit markets in the US and Europe.

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