The company should be able to hold on to its margins, a function of greater revenue per employee and lower headcount growth vis-a-vis revenue growth
Infosys’ constant currency revenue growth guidance of 6-8% year-on-year (y-o-y) for FY19 was on expected lines. The marginal beat can be ascribed to a weaker exit in 4Q (0.6% CC) than our expectation (1.5% CC). This implies that the compounded quarterly growth rate (CQGR) will be better if the guidance is met.
To meet its guidance range of 6-8% y-o-y constant currency (CC) revenue growth in FY19, Infosys will have to clock a CQGR of 1.8-2.5% in the next year. We are assuming 7.5% y-o-y CC growth factoring the guidance and incremental revenue from the acquisition. A cross-currency tailwind of 130 basis points (bps) would imply USD revenue growth of 8.8% for FY19.
Net profit grew 2.4% quarter-on-quarter (q-o-q) to Rs 36.9 billion, below our estimate of Rs 38 billion, due to an impairment loss of Rs 1 billion taken in respect of Panaya.
Infosys also cut its FY19 EBIT margin guidance to 22-24% versus the FY18 band of 23-25%. This will largely factor in investments in localised talent, revitalising sales, digital capabilities and delivery staff. The 1% revision amounts to $120 million, and considering that these are investments in people, which will only come gradually, we see the lower end of the margin band as conservative, and expect it to be raised during the course of the year.
The additional $2 billion payout over and above the normal dividend payout (policy of 70% of FCF) will peg the cash returns at a high level (Rs 100/share pre-tax, 8.6% of current market price) for the second year running. This should act as a crucial support for the stock.
Given these developments, we have cut our earnings by around 2% for FY19/20E, factoring in the weaker exit and the marginal profitability decline. Infosys’ performance in the recent years has been in line with peers.
The guidance on revenues was on expected lines. However, we believe that the lower end of the EBIT margin band of 22% is conservative, with pricing pressures seemingly tailing off and the share of higher-margin Digital inching up. Our price target of Rs 1,330 discounts forward earnings by 16x. We maintain a ‘buy’ rating on the stock in the light of the developments.
Infosys gave a low key welcome to Parekh, unlike the aggressive marketing exercise it undertook to welcome Sikka
Salil Parekh will earn an annual salary of Rs 162. 5 million ($ 2.55 million) as the CEO of Infosys, which is a quarter of what Infosys had signed up with his high profile predecessor Vishal Sikka, who quit the firm after three years in turmoil.
The compensation also reflects the reality at Infosys and its chairman Nandan Nilekani who would like the low profile senior executive to execute a vision of focused delivery for customers than over promise and under delivery that would be in contrast with the company’s culture.
Parekh, the soft-spoken executive who was poached from global rival Capgemini, will get an annual fixed salary of Rs 65 million and variable pay of Rs 97.5 million that would be compensated based on achieving metrics set by the company. Infosys has also offered stock options worth Rs 97.5 million that would be vested over two years, the company said in its postal ballot that was disclosed in regulatory filings. Pravin Rao, interim MD and CEO has been redesignated as COO.
Sikka, who had a tumultuous three-year stint at Infosys, had signed up $ 11 million package including stock options. However, in fiscal 2017, the last of the three-year term, Sikka earned Rs 451 million ($ 7 million), after he struggled to grow business faster in a volatile business environment and the battle he was facing internally with the entrenched system at Infosys.
Infosys has also spelt out the severance pay terms – half his compensation of the previous 12 months and vesting of outstanding stock options till that period.
The severance pay to Rajiv Bansal, the former CFO, ten times his annual compensation, sparked a controversy over alleged failure in corporate governance norms, which eventually brought the downfall of Sikka and R Seshasayee, the former Chairman at Infosys.
The stock listed at Rs 735, a 5% premium against its initial public offer price of Rs 700 per share on the National Stock Exchange.
SBI Life Insurance Company made a quite debut by listing at Rs 735, a 5% premium against its initial public offer (IPO) price of Rs 700 per share on the National Stock Exchange (NSE).
At 10:02 AM; the stock was trading at Rs 734 on the NSE. It hit a high of Rs 740 and low of Rs 730 so far. A combined 11.5 million shares exchanged hands on the NSE and BSE.
The company’s Rs 8,400 crore IPO was subscribed 3.587 times. The portion meant for qualified institutional buyers (QIBs) was oversubscribed 12.56 times, while that of non-institutional investors received 70% subscriptions and retail investors 85%, data available with the NSE showed.
SBI Life is a joint venture between India’s largest lender State Bank of India and BNP Paribas Cardif, the insurance holding company of France.
SBI Life InsuranceIPOis the largest private insurer in terms of new business premium (NBP) generated with 20.04% market share and has assets under management (AUM) of Rs 97,700 crore. The company is riding on ULIP business (71% APE mix) which has lower regulatory risk, lower capital requirement and long term opex benefit, but also has lower margins and is highly dependent on capital market performance.
“SBI Life is increasingly focusing to improve protection business share which is high margin and have moderate opex. Hence, we believe Operating RoEV to remain stable at 23% currently and improve post over‐run margins to around 18% by FY19 from currently 15%. At the upper band of Rs 700, the company would trade at 3.18x Sep‐19 EV which we believe is fully priced and hence we recommend to Subscribe for long term gains,” analysts at Prabhudas Lilladher said in IPO note. Read Full Article
Firm to prune domestic costs through initiatives such as voluntary separation
Cognizant Technology Solutions plans to sharply increase local hiring in the US this year with increased demand for co-innovation and on-site presence from clients. The Nasdaq-listed technology services major said it would look at talent across local community colleges to big management universities to man different projects in the US.
Last month, when the United States Citizenship and Immigration Services opened the window for applications, Cognizant applied for “less than half” H1B visas compared with last year.
“We are evolving our workforce and delivery in the United States. Cognizant hired 4,000 US citizens in 2016, and in 2017 and beyond, we expect to significantly ramp up our US based workforce by hiring experienced professionals in the open market and by making more use of university programmes. We are shifting our workforce largely in response to clients’ increasing need for co-innovation. But we still seek visas for highly-specialised and skilled talent…We expect to further reduce our need for these visas going forward. As part of our shift, we continue to expand our US delivery centres,” Rajeev Mehta, President, Cognizant told analysts on Friday.
At the same time, the company has taken up initiatives such as the voluntary separation package, which was announced last week, for senior employees to optimise costs.
“We are looking for opportunities to further optimise cost structures…We just launched earlier this week a voluntary separation package that programme will go till the end of Q2 and we will see the benefit of that in Q3,” said Karen McLoughlin, chief financial officer, Cognizant.
The company is the second software provider after Infosys to announce increase in local hiring in the US. Cognizant, however, has not disclosed any numbers. Beyond the business shift towards digital, Donald Trump-led US administration’s moves towards H1B visa restrictions have resulted in companies focusing on local hiring there.
Cognizant saw a 26 per cent growth in net profits to $557 million for the quarter ending March 31, 2017, while revenues grew by 10.7 per cent to $3.55 billion. ReadMore
HNI category has got 1.14 times subscribed and the retail quota was subscribed 42%
SH Kelkar & Company has received full subscription from its Rs 500-crore Initial Public Offering (IPO), which closes on Friday. IPO is the act of selling shares in a company for the first time.
SH Kelkar Listing Date: The Mumbai-based firm has so far received 22.3 million bids for the 20.2-million shares on offer in the IPO. The qualified institutional buyer category quota got subscribed 2.25 times. Wealthy or high net worth individual quota was subscribed 1.14 times. The retail quota was subscribed 42 per cent.
SH Kelkar Allotment Date: SH Kelkar has set a price band of Rs 173-180 apiece for its IPO. On Tuesday, the company had raised Rs 150 crore from 13 anchor investors, including T Rowe Price, ICICI Prudential Mutual Fund, and Axis Mutual Fund.
Mumbai-based fragrance manufacturer SH Kelkar’s Initial Public Offering (IPO) was subscribed 42 per cent on day one, on Wednesday. The 20.2-million share offering has so far received 8.4 million bids. SH Kelhar is looking to raise a little over Rs 500 crore from its IPO, to close on Friday. The company has priced its IPOin the range of Rs 173 to Rs 180 per share.
JM Financial, Kotak Mahindra Capital, and Keynote Capital are handling the IPO.
70% of bids from foreign investors; share offering lapped up six times; retail quota under-subscribed
The Rs 3,000-crore initial public offering (IPO) of InterGlobe Aviation, which runs IndiGo, sailed through without any turbulence, with foreign investors on board. It was subscribed a little over six times. The 30-million share offering saw nearly 185 million bids, worth about Rs 14,000 crore. About 70 per cent of the offering, or 127 million bids, came from foreign institutional investors (FIIs).
IndiGo Listing Date: Global investors scrambled to buy InterGlobe shares, hoping India’s air travel penetration would increase through the next few years. As of now, the penetration level is only 0.08 annual domestic seats per capita, against penetration rates of 0.35-0.6 in other developing markets such as Brazil, Turkey, Indonesia and China, according to Angel Broking.
IndiGo Allotment Date: IndiGo operates in the lucrative low-cost carrier (LCC) segment. On listing, the airline would be one of the world’s leading LCCs in terms of market value.
The qualified institutional buyer segment, which includes institutional investors such as FIIs, mutual funds and insurance companies, was subscribed 17.8 times. The non-institutional investor category was subscribed 3.6 times.
IndiGo IPO flies mostly on global wings The retail investor category — those investing less than Rs 2 lakh — was subscribed only 92 per cent. Around 45 per cent of the IPO was reserved for retail investors, while seven per cent of the issue was reserved for InterGlobe employees.
Despite a 10 per cent discount on offer, the employee quota was subscribed nearly 13 per cent. The undersubscribed shares meant for the retail category, as well as employees, will be distributed among other investor segments, which saw high subscription.
Experts said the retail investor portion received a lukewarm response, owing to concern over valuations. Most domestic brokerages had termed the IPO pricing expensive; grey market activity, too, suggested marginal listing day gains.
For the IPO, InterGlobe had set a price band of Rs 700-765 a share. Given the heavy demand, the IPO is likely to be priced at the top end of the band. That will value the company at about Rs 27,500 crore. At Rs 765 a share, InterGlobe’s market value will be six times that of Jet Airways and 10 times that of SpiceJet.
Though most analysts had hailed IndiGo’s operational efficiencies, they felt the pricing had left little on the table for investors. “While we appreciate Indigo’s efficient operations and management capability to deliver profitable growth in a sector where few have succeeded globally, we find valuations expensive. At 10.2 times the FY15 EV (enterprise value)/Ebitdar (earnings before interest, tax, depreciation, amortisation and rent), at the higher end of the peer sector range, the proposed issue price fully factors profits on aircraft trading and lower than the sector’s aircraft maintenance costs in perpetuity, plus the benefits of lower crude prices and mid-teen volume growth through the next 10 years,” domestic brokerage house Ambit had said in a report.
“Foreign investors that applied in IndiGo have a record in being invested in other LCCs like RyanAir, Air Asia and others. So, they had a greater level of confidence, while for domestic investors, this offering was a first of its kind. That’s why it was more FII-led. Still a deal of this size has seen good demand from most investors,” V Jayasankar, head of equity capital markets, Kotak Investment Banking.
Investment bankers handling the IPO had said marquee global investors made big-ticket applications. According to reports, famed investor Rakesh Jhunjhunwala invested a significant sum. Business Standard couldn’t confirm this independently.
Citigroup Global Markets, JP Morgan, Morgan Stanley, Barclays Bank, Kotak Mahindra, UBS Securities were the investment banks that handled the IPO.
India’s largest airline company, InterGlobe Aviation, which operates IndiGo, is seeking to raise about Rs 3,000 crore from its initial public offering (Indigo IPO). While about Rs 1,800 crore of this is an offer for sale, going to the existing shareholders, the rest is a fresh issue. At Rs 765, upper end of the band, the company is looking at a valuation of Rs 27,500 crore. The two listed aviation players, Jet Airways and SpiceJet, have a combined market cap about a fourth of this number.
Why IndiGo is asking for a higher valuation is due to a consistent record of superior operational performance, across parameters. The key differential is, of course, the way it manages costs. Costs per available seat km (CASK, measured in US cents) at 5.95 is much lower than SpiceJet’s 6.68 and Jet Airways’ 9.05. Excluding fuel, the single biggest cost item, its CASK at 2.87 cents is lower than GoAir and SpiceJet, the other low-cost carriers. A single aircraft type, low distribution costs and a younger fleet have helped keep down costs on operations and maintenance. Its decision to order 100 A320s in 2005 helped it negotiate favourable terms, analysts say. The sale-and-lease back arrangement helped it gain about Rs 3,500 crore.
IndiGo Airline IPO: A robust business model but no discount in IPO price Coupled with the fleet expansion and strong passenger volumes, the low CASK has helped it grow faster than the market. IndiGo’s market share has increased from 14.5 per cent in FY10 to about 36 per cent with passenger volumes increasing 26 per cent. Higher volumes and load factors, along with growing revenue per passenger, has translated to 40 per cent annual growth in domestic revenues over FY10-15, while earnings before interest, taxes, depreciation, amortisation and rentals (Ebitdar) have grown 25 per cent. The company has also benefited due to the multiple challenges faced by competition (management change, high cost structure, lack of pricing discipline, etc.), which helped IndiGo move ahead.
A few favourable tailwinds will benefit the entire sector going ahead. The first is passenger volumes. The sector has been growing at about 12 per cent annually and analysts say demand would be 1.2-1.5 times gross domestic product growth which should help all players. Especially IndiGo, given its fleet strength and the fact that it is growing faster than the market. Growth in recent months has been a strong 20 per cent for the sector, with IndiGo outperforming peers. The other positive for the company is cheaper fuel costs which should boost its profits.
In FY15, the company made Ebitdar margins of 27 per cent and net margins of nine per cent as compared to 20 per cent and four per cent in FY14. Ebitdar margins, given lower fuel costs, spurted to 37 per cent in the June quarter, with net margins at 15 per cent enabling the company to report a net profit of Rs 640 crore. While the September quarter and the March quarter are not the best quarters of the year, analysts believe the company should be able to close the year at about Rs 2,400 crore in net profits.
The listed players far lag IndiGo and have a patchy net profit record; so, a comparison with the better global performers is in order. Low cost European and American carriers have their enterprise value/Ebitdar ranging between seven and eight times. While the company deserves a higher multiple given that the Indian market is growing faster, the IndiGo IPO, at about 7.6 times its FY16 EV/Ebitdar estimates, is slightly on the expensive side. Analysts say the company should have left something on the table for investors.