Buffett Speculation Lifts Kotak Stock
Bank shares surge 8.5% in anticipation of a stake sale by promoter Uday Kotak to Berkshire Hathaway
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.
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