Buf­fett Spec­u­la­tion Lifts Ko­tak Stock

Bank shares surge 8.5% in an­tic­i­pa­tion of a stake sale by pro­moter Uday Ko­tak to Berk­shire Hath­away

The Economic Times - - Front Page - Our Bureau

Mum­bai: Ko­tak Mahin­dra Bank shares surged 8.5%, the most in five years, on spec­u­la­tion that bil­lion­aire War­ren Buf­fett’s Berk­shire Hath­away may buy a stake in the lender as pro­moter Uday Ko­tak runs against time to meet a reg­u­la­tory dik­tat on re­duc­ing his hold­ings.

The bank, which has been among the best per­form­ers in the past three years, closed at .₹ 1,282.25 on the BSE, with a mar- ket cap­i­tal­i­sa­tion of .₹ 2.4 lakh crore. The shares climbed as much as 13.9% to .₹ 1,345.35 dur­ing the day.

Ko­tak Mahin­dra, re­spond­ing to a clar­i­fi­ca­tion sought by the BSE on a news re­port, said that there was no de­vel­op­ment that war­ranted a reg­u­la­tory dis­clo­sure. “We con­firm that we have noth­ing to re­port to the ex­changes,” the bank said in a fil­ing dur­ing trad­ing hours. “Ko­tak Mahin­dra Bank is un­aware of any plans by Berk­shire Hath­away buy­ing a stake in the bank.” Uday Ko­tak, who was at a book launch func­tion in Mum­bai, de­clined to com­ment on the de­vel­op­ment. Ko­tak is man­dated by RBI to cut his stake to 20% by De­cem­ber, 15% by 2020 and even­tu­ally to 10% as the reg­u­la­tor seeks to re­duce the con­cen­tra­tion of bank own­er­ship in the hands of in­di­vid­u­als to avoid con­flicts of in­ter­est.

“In­vestors are wor­ried about the im­pact on bal­ance sheet. Higher in­vest­ments in IPs as well as ac­qui­si­tions is weigh­ing on free cash flow tra­jec­tory,” said Madhu Babu, IT an­a­lyst at bro­ker­age Prab­hu­das Lil­lad­her.

HCL will have to pay nearly half of the $1.8 bil­lion by mid-2019, when it ex­pects to close the deal. The re­main­ing amount will paid within a year af­ter that, which the com­pany ex­pects to fund through in­ter­nal ac­cru­als and a debt of $300 mil­lion.

The com­pany has a part­ner­ship with IBM for IP of five prod­ucts, in­clud­ing the email client Lo­tus Notes. These prod­ucts are ex­pected to gen­er­ate in­cre­men­tal rev­enue of $650 mil­lion by 2020, a lit­tle less in the year be­fore, and in­crease IP’s con­tri­bu­tion to over­all rev­enue to 30%, from 22%. Cur­rently, HCL earns around $1 bil­lion from its prod­ucts and so­lu­tions.

“This port­fo­lio can give more than 50% op­er­at­ing mar­gin (Ebitda) and $300 mil­lion an­nual free cash flow in the first few years,” said Kuldeep Kaul, IT an­a­lyst at bro­ker­age ICICI Se­cu­ri­ties.

“The growth on this port­fo­lio may be lit­tle slower, but the prof­itabil­ity char­ac­ter­is­tics are bet­ter than other port­fo­lios. On bal­ance, it is still a growth port­fo­lio and syn­er­gies will take longer,” he added.

AC­QUI­SI­TION SPREE

Shiv Nadar-owned HCL has been on an ac­qui­si­tion spree, snap­ping up com­pa­nies such as Axon Plc, the UK SAP im­ple­men­ta­tion provider, lo­cal en­gi­neer­ing ser­vices firm Geo­met­ric and USbased Ac­tian that helps clients shift IT in­fra­struc­ture to cloud.

Vi­jayaku­mar, pop­u­larly known as ‘CVK’, has ar­tic­u­lated a three-point strat­egy of core ser­vices, next-gen­er­a­tion ser­vices and plat­form and prod­ucts for the com­pany to out­pace peers. In July, the com­pany dis­placed Bengaluru-based Wipro to emerge the third­largest In­dian IT ser­vices com­pany.

An­a­lysts reckon the IBM ac­qui­si­tion will help bol­ster HCL’s strength in its in­fra­struc­ture ser­vices busi­ness, which con­trib­utes over a third of its rev­enue.

“By tak­ing over some of the le­gacy tech­nol­ogy prod­ucts and in­fra­struc­ture man­age­ment-re­lated work from IBM, they tend to stay ahead of com­pe­ti­tion when the same clients go for dig­i­tal trans­for­ma­tion,” said Ra­jesh Gupta, se­nior IT sec­tor an­a­lyst and for­mer part­ner with ISG. “This ac­qui­si­tion of IBM prod­ucts seems to be strate­gic to get both tra­di­tional tech­nol­ogy ser­vices busi­ness and share of dig­i­tal trans­for­ma­tion.” The IBM prod­ucts, which rep­re­sent a to­tal ad­dress­able mar­ket of more than $50 bil­lion, in­cludes App­scan for se­cure ap­pli­ca­tion de­vel­op­ment, BigFix for se­cure de­vice man­age­ment, Unica for mar­ket­ing au­to­ma­tion, Com­merce for omni-chan­nel ecom­merce, Por­tal for dig­i­tal ex­pe­ri­ence, Notes & Domino for email and low-code rapid ap­pli­ca­tion de­vel­op­ment, and Con­nec­tions for work­stream col­lab­o­ra­tion. HCL’s bet on IP from prod­ucts and so­lu­tions is also in line with the grow­ing trend of IT ser­vices com­pa­nies of­fer­ing plat­forms to gen­er­ate rev­enue. This would also help com­pa­nies shift from tra­di­tional ser­vices that gen­er­ate rev­enue based on projects to sub­scrip­tion in­come that would be con­sis­tent over the long term.

“We see tremen­dous po­ten­tial for cre­at­ing com­pelling ‘as-a-ser­vice’ of­fer­ings by com­bin­ing these prod­ucts with our Mode-1 and Mode-2 ser­vices,” said Vi­jayaku­mar.

In ad­di­tion to soft­ware prod­ucts, the ac­qui­si­tion will also give HCL more fire­power on the ground since it will bring in sales teams from IBM in key mar­kets. An­a­lysts cau­tion that de­spite the com­pany’s up­beat tone, there could be chal­lenges ahead.

“While in the­ory this bold move is a step in the right di­rec­tion, the ground re­al­ity is that these IBM prod­ucts come with a tonne of bag­gage that can po­ten­tially throw a span­ner in the works,” said San­chit Vir Go­gia, CEO of Grey­hound Re­search.

The prod­ucts are ex­pected to gen­er­ate in­cre­men­tal rev­enue of $650 mil­lion by 2020

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