TCS Q1 Results
There is bad news on the Tech Front
If TCS, the most valuable Indian company, was judged by its latest quarter results, then it was surely an unalloyed disappointment. What actually disappointed an investor is not just the quarterly performance but the consistently weakening metrics over the last 12 quarters. Agreed that the global environment is not too conducive for IT companies! Tech spending is down, the focus is shifting increasingly digital and India’s US equation is riled by visa related issues. But the problem at TCS is slightly larger than that…
Consistent weakening at TCS…
One has to only look at the sequential performance of TCS over the last 12 quarters, both in terms of growth and margins. The operating profit margin (OPM) of TCS has fallen from closer to the 27.6% in 2015 to around 25.3% in 2017. There is pressure on realized margins due to stiffer competition and more demanding clients. But, TCS has also not able to diversify its core model to adapt to the changing conditions, as it was expected to be doing.
The bigger problem for TCS is growth. Of course, TCS has attained a certain size and sloth and therefore rapid growth is unlikely to happen. But the growth rate of TCS top-line has fallen by over 600 basis points from 12.3% to 6.1%. There is a fundamental drag on the TCS financials and the worry is that this could continue in next quarter too.
ONGC + HPCL
Remember, there are clear merits in oil consolidation…
The government has almost made it clear that the ONGC – HPCL deal will be consummated in the month of July 2017 itself. While the actual contours of the deal are not yet clear, this should be seen as the first step towards the oil sector consolidating. Here is how the deal will actually work out…
Sorry, not a divestment…
The government of India has been at pains to underscore the fact that the sale of HPCL is not exactly a traditional divestment measure. Under the proposed deal, the government will sell its 51.11% stake in HPCL to ONGC for a consideration of around $4.5 billion. This will be a big boost to the government as it tries to get closer to its full year divestment target of $11 billion. But the bigger consideration for the government will be to retain control over the hydrocarbon segment within the public sector. HPCL and BPCL are high dividend yield companies and the government will prefer that these payouts are retained within the PSU space. An ONGC buyout will fit that bill.
Also from the point of view of oil security, it will be a more favorable situation if the control of the oil companies is retained within the public sector. This will enable the oil ministry and the government to have a greater control over the investment and spending decisions of the oil companies. With this acquisition, control and security can still be maintained.
Acquisition not a merger…
The government is likely to prefer a sale of HPCL shares to ONGC with HPCL retaining its entity as a listed company. Of course, post the deal HPCL will be a subsidiary of ONGC. But, merging HPCL into ONGC would mean that HPCL would cease to exist and that would be unfair to the shareholders of HPCL. Also HPCL is a highly profitable company and keeping these two companies separate will give ONGC a better hedge in a volatile oil market with management independence for HPCL.
IDFC and Shriram
The logic is good but practical difficulties abound…
In one of the biggest merger announcements in the financial sector, IDFC and Shriram have agreed to come together to create a financial behemoth that spans banking and most aspects of financial services. While the merger is still subject to regulatory approvals, there is obviously a lot of thinking that has gone into this merger deal. But first let us look at the basic structure of the deal.
How the deal is structured…
Considering the size of both the companies, the actual deal is likely to be quite complex. There are two key companies in the Shriram Group viz. Shriram Transport and Shriram City Union which will be part of this merger. While SCUF will be entirely merged into IDFC Bank, Shriram Transport will become a 100% subsidiary of the parent IDFC. Therefore the parent IDFC will now emerge as the holding company for the combined group. There is a strong reason why Shriram Transport has not been merged into IDFC.
Shriram Transport has a loan book that is larger than IDFC Bank and hence the bank may have a bandwidth issue managing a surge in operating size. If it had merged with IDFC then the equity dilution would have pushed IDFC’s stake in the bank below the stipulated 40%.While SCUF will cease to exist, Shriram Transport will be delisted and become a 100% subsidiary of IDFC.
Where are the synergies?
To be fair, there are synergies to both parties in the deal. Shriram group has a huge loan book in excess of Rs.100,000 crore but does not have the balance sheet strength on its own. From that perspective, the merger with IDFC will give Shriram the requisite balance sheet soundness to expand its business. For IDFC Bank, this is the best bet to build their loan book by acquiring the 10 million clients of Shriram Group in one go. Since the focus of IDFC Bank is more on digital banking, the client acquisition and management costs will be substantially lower.
