L&T Infotech’s valuation gets a reality check

L&T Infotech’s valuation estimates were far too high to begin with, necessitating the sharp cut in the issue size.

In an unusual turn of events, L&T Infotech Ltd on Monday withdrew the draft red herring prospectus (DRHP) it filed with the Securities and Exchange Board of India, and filed it afresh on Tuesday. According to investment bankers, this was necessary because the estimated size of the issue has been cut by more than 10%. As it turns out, the estimated size of the issue has been cut by almost 30% to around $200 million, according to news reports.

The Nifty IT index has corrected by around 5% since the time L&T Infotech filed its DRHP the first time in end-September.

Clearly, its valuation estimates were far too high to begin with, necessitating the sharp cut in the issue size.

Parent Larsen and Toubro Ltd (L&T), which currently owns all of the company’s shares, is offering a part of its stake in the issue. The number of shares to be issued will remain the same at 17.5 million. Based on the earlier rumoured issue size of up to Rs.2,000 crore, L&T was expecting a valuation of around 24 times fiscal year 2015 earnings. This has been toned down to around 16-17 times.

Large-sized IT services companies such as Tata Consultancy Services Ltd and Infosys Ltd trade well above 20 times FY15 earnings, and so is the case with some smaller-sized firms such as Mindtree Ltd and Hexaware Technologies Ltd. But these firms have grown at faster rates.

Mindtree has grown revenues at an annual average growth rate of 23% in the three years till FY15, while growth at Hexaware has stood at 21.2%. L&T Infotech’s growth was lower at 16.1% during the same period.

Operating profit margins are comparable with Mindtree at around 20%, although they are ahead of Hexaware. However, free cash flow generation is lower at L&T Infotech at around 9% of revenue. For the other two firms, free cash flow generation as a proportion of revenue was in double-digits.

Besides, like most other mid-sized firms, L&T Infotech carries greater risks such as high client concentration. Its two largest customers, Citibank and Chevron, account for 21% of revenue.

Against this backdrop, L&T was clearly aiming too high by demanding valuations of around 24 times trailing earnings earlier. The fact that it has toned down expectations sharply should help the issue sail through.

Sun Capital

Realty firms miss residential sales guidance for 2015-16

A few developers revise sales target for March quarter; weak demand, delay in approvals seen as reasons for slump

Bengaluru: Real estate developers struggled to meet their residential sales guidance for the year 2015-16 due to tepid consumer sentiment and delays in securing project approvals.

Unable to launch projects and sell in line with expectations, a few realty firms even revised or downsized their sales targets in the March quarter.

While real estate developers in Mumbai and Bengaluru selectively launched projects in the last fiscal year, most in India’s largest property market—the National Capital Region centred on Delhi—refrained from bringing more new supply into the market—causing sales to shrink.

Bengaluru-based Prestige Estates Projects Ltd, which generated about Rs.5,030 crore of sales in 2014-15, includingRs.1,000 crore of rental income, is expected to have clocked a little above Rs.3,000 crore in 2015-16.

Prestige Estates, which had set an annual sales target ofRs.5,500- 5,800 crore for 2015-16, revised it in the course of the year.

PrestigeGroup’s chairman and manaing director Irfan Razack said the approval delays and the inability to launch projects in Chennai and Hyderabad affect- ed the sales momentum.

“We are happy with the numbers in the current environment, and we would be the highest to generate such sales in the current environment,” Razack said.

In the April-December period, Prestige launched just 3.8 million sq.ft of the full year’s target of 12 million sq.ft and met just 33% of the Rs.5,800 crore sales target. However, with three residential launches in the March quarter and one commercial project seeing good response, the company is targeting more than Rs.1,000 crore of sales bookings in the last quarter and Rs.3,000 crore for FY16, according to an Elara Securities India (Pvt.) Ltd report.

Prestige did not give out exact numbers due to the impending results.

Another Bengaluru developer, Sobha Ltd, last week said it has registered new sales of 3.38 million sq.ft, valued atRs.2,012 crore, 3.2% higher than its 2014-15 performance, in a scenario where demand remained muted in almost all property markets in the country.

Sobha’s affordable housing brand Dream Acres emerged as its fastest selling product.

An Elara Securities report said that “FY16 is the third consecutive year where Sobha Ltd has missed its annual sales guidance with 3.4 million sq.ft of sales worth Rs.2,010 crore versus guidance for 4 million sq.ft of sales worthRs.2,600 crore. This was largely owing to continued delay in approvals for new launches (Kochi, Chennai and Gurgaon), slowdown in the Rs.1 crore-plus segment and sustained weakness in the Gurgaon market.”

“Most developers missed their sales guidance last year, but 2016-17 is expected to be much better. Developers in Bengaluru such as Sobha and Prestige have a strong pipeline of launches, and that will naturally boost sales numbers. We expect NCR to remain slow and Mumbai will be mixed bag where some developers will sell well,” said Adhidev Chattopadhyay, real estate analyst at Elara Capital.

On a pan-India basis, Mumbai-based Lodha Group again seems to have hit the highest sales numbers, crossingRs.8,000 crore in gross sales—far ahead of Prestige Estates and Godrej Properties Ltd (GPL). GPL generated sales of about 4,422 crore in the first three quarters of FY16. The company didn’t disclose full year numbers. Lodha Group, which beat India’s largest developer DLF Ltd and Prestige in 2014-15 to clock the highest new residential sales of Rs.7,800 crore, had set an ambitious target of Rs.9,000 crore for 2015-16.

Lodha Group’s 40-acre residential project Amara in suburban Thane was the largest contributor towards sales last year. In the past month or so, it has clocked 1,500 apartment bookings that would amount to Rs.1,300 crore. In total, in 2015-16, Amara contributed nearly Rs.3,000 crore, followed by Palava, a township near Mumbai which generated another Rs.1,200 crore.

“The product, brand and price are the three things that played important roles in generating this kind of sales. We have also been able to significantly improve the net to gross ratio without sustained consumer-centric approach,” said Prashant Bindal, chief sales officer, Lodha Group.

While the gross sales typically indicate customers who have paid the booking or the signing amount, net sales would mean when a customer actually makes the initial 20% payment.

Pune-based Kolte-Patil Developers Ltd, which had set a target of selling 3-3.5 million sq.ft of residential space, revised it to 2-2.5 million sq.ft in the last quarter, Elara Capital’s Chattopadhyay said.

In 2015-16, DLF is expected to match the level of 2014-15, when it clocked sales of about Rs.3,850 crore, said analysts.

DLF’s chief executive Rajeev Talwar said that there was a visible rise in customer enquiries. “Customers are gradually coming back. In the last 5-6 years, developers only launched residential projects leading to a lot of supply in the market and this will take time to be absorbed. But... the new financial year will definitely be better in terms of buyer sentiment,” Talwar said.

Sun Capital

Sun Life completes stake hike in Aditya Birla’s insurance JV

ABNL will hold the controlling stake in the insurance joint venture with 51% stake

Mumbai: Aditya Birla Nuvo Ltd (ABNL) on Monday announced the completion of the transaction that increased Canada-based Sun Life Financial’s stake in ABNL’s insurance joint venture, Birla Sun Life Insurance, from 26% to 49%.

ABNL will hold the controlling stake in the insurance joint venture with 51% stake, the company said in a release.

Sun Life paid ABNL Rs.1,664 crore for the 23% additional stake, valuing Birla Sun Life Insurance at Rs.7,235 crore.

ABNL sold close to 437 million shares constituting 23% of the issued and paid up equity share capital of Birla Sun Life Insurance to Sun Life Financial, the release said.

ABNL said the proceeds from the stake sale will help the company reduce its debt substantially. The deal, coupled with free cash flow generation from various divisions, will strengthen ABNL to support its growth plans, the company release said.

Birla Sun Life Insurance, with a market share of 6.9% for the nine months ended 31 December 2015, managed assets worth Rs.30,421 crore at the end of December.

The insurer presently has at least 1.6 million policy holders.

Sun Capital

Standard Chartered to sell over $1 billion of India loans

Standard Chartered starts discussions with potential investors to sell loans in the backdrop of an increase in stressed assets

Mumbai: Standard Chartered Plc. will sell over $1 billion in loans from its India book as it seeks to clean up its loan portfolio, said three people familiar with the development. The bank has started discussions with potential investors, the people added.

Bloomberg News reported on Monday morning that Standard Chartered will sell nearly $4.4 billion in loans across its Asia portfolio, including loans in India.

The UK-based bank’s decision comes against the backdrop of an increase in stressed assets. On 23 February, the bank reported a loss of $981 million from its India operations, while loan impairments, including restructured loans, across its India portfolio surged almost eightfold to $1.3 billion in 2015 from $171 million in 2014. Overall, the UK-based lender’s loan impairments surged to $4 billion in 2015 from $2.14 billion in 2014. As of June 2015, Standard Chartered had a gross non-performing assets ratio of 9.07%, according to disclosures made by the bank.

“The bank was earlier looking to sell the entire portfolio but after seeing that there isn’t much demand, it has decided to sell individual assets which includes both external commercial borrowings and local loans,” said one of the three people, adding that conversations are underway with large global funds that are looking to invest in stressed assets in India. He spoke on condition of anonymity as the talks are confidential.

The second person (who also asked not to be identified) confirmed that more than $1 billion in loans are on sale from the bank’s India portfolio.

“We said in November when we announced our strategic review that we would be aligning our risk profile to the new strategy, and confirmed then that the Group had identified a number of exposures for liquidation that exceeded the new risk tolerance levels. While we don’t comment on individual clients, we are making good progress on executing our strategy, and we will provide an update to our investors in due course,” a spokesperson for Standard Chartered India said in an e-mail.

Talks have begun with firms such as CPPIB (Canada Pension Plan Investment Board), KKR India and SSG Capital Management Ltd, said the first person.

A CPPIB spokesperson declined to comment while an SSG Capital Management spokesperson did not respond to an e-mail seeking comment. Sanjay Nayar, chief executive officer (CEO) of KKR India, declined to comment.

Standard Chartered, one of the most active foreign banks in lending to Indian firms, saw bad loans surge due to its exposure to sectors such as infrastructure where projects were significantly delayed on account of financial, regulatory, or environmental issues.

In an interview in December, Ajay Kanwal, regional CEO of Asean and South Asia at Standard Chartered, acknowledged that over-concentration was an issue in the bank’s India portfolio and that it was trying to correct that. In November, Bloomberg reported that about $5 billion in advances that Standard Chartered made to Indian borrowers had been internally classified as being at risk of default. This includes the $2.5 billion that Standard Chartered loaned to the Essar group.

According to the third person, among the loans that the bank is looking to sell are those given to the Essar group. The bank is also looking to sell some loans in the engineering, procurement and construction (EPC) segment.

An Essar spokesperson said the group would not be able to respond immediately and sought time till Tuesday.

According to the bank’s Basel III disclosures, as of June 2015, over 12% of advances were tied to the infrastructure sector, including companies in businesses such as communication, electricity generation and roads. The bank also had roughly 6% of its book tied to the metal sector which has been experiencing stress due to falling metal prices and rising imports.

“Impairments increased significantly, primarily driven by exposures to commodities and India, where corporates were impacted by continued stress on their balance sheets, coupled with a more challenging refinancing environment,” the bank said in its earnings report in February.

Satish Gupta, managing partner, Vertex Capital Partners, a distressed asset advisory firm, said selling company-specific exposure may get a better response than attempts to sell a large chunk of loans together.

“Investors would like to focus on turning around a distressed company by acquiring and aggregating debt from various lenders with an aim to restructure and recapitalize the business,” said Gupta.

He added that a portfolio approach (where a chunk of loans is sold) involves buying debt of companies from different industries, making it difficult for the buyer to focus on reviving one particular company.

Investors that buy portfolios usually value a loan on the basis of what they are likely to get if they strip and sell the assets of the lender as opposed to a turnaround. “Banks therefore get higher valuations by selling large exposures as separate individual cases rather than in portfolios,” Gupta added.

Standard Chartered is not the only bank trying to clean up its loan book. Gross bad loans across India’s 39 listed banks surged to Rs.4.38 trillion for the quarter ended 31 December from Rs.3.4 trillion at the end of September, shows data collated by Capitaline, a financial database. Bad loans increased after the Reserve Bank of India asked banks to recognize bad assets and set aside money to cover the risk of default by March 2017.

A majority of these bad loans have come from the corporate sector, where credit quality continues to remain weak.

India’s largest rating agency Crisil downgraded debt worthRs.3.8 trillion in the last financial year—the highest amount of downgrades in any year. The rating agency expects credit quality for India companies to remain under pressure in the near term.

“Debt of firms downgraded by Crisil in fiscal 2016 has risen to an all-time high of Rs.3.8 trillion, underscoring that credit quality pressures continue to mount for India Inc,” said Crisil in a 4 April report.

A CARE Ratings’ Debt Quality Index published last week showed that credit quality of debt continued to decline.

Sun Capital

Why banking in India will never be the same again

India needs more banks of different shapes, sizes and business models. The banking regulator is responding to this need

Last week, the focus was on the change in the Reserve Bank of India (RBI)’s stance on liquidity and the cut in its benchmark policy rate and many of us overlooked the structural changes in the banking industry architecture that the Indian central bank had hinted in its first bi-monthly monetary policy for fiscal 2017. If RBI is serious about it, banking in India will never be the same again.

After giving licences to two full-service or so-called universal banks, 11 payments banks and 10 small finance banks, RBI is ready to release norms for bank licensing on tap soon. It is even exploring the possibility of licensing other differentiated banks. A discussion paper on that is expected in the next few months and they could include wholesale banks, custodian banks and investment banks.

The two new universal banks, Bandhan Bank Ltd and IDFC Bank Ltd, started operations last year. While Bandhan continues to focus primarily on small loans, the mainstay of its earlier microfinance avatar, IDFC is a corporate bank with a consumer banking wing. By April 2018, we could see 20 more—10 payments banks and an equal number of small finance banks. Of the 11 entities RBI had given conditional payments bank licences to, Cholamandalam Distribution Services Ltd has withdrawn from the race, citing competition and long gestation period. A couple more could follow. Meanwhile, Jalandhar-based Capital Local Area Bank will kick off operations as the first of the small finance banks this week as Capital Small Finance Bank Ltd.

Payments banks can collect deposits of up to Rs.1 lakh, provide payments and remittance services and distribute third-party financial products. They won’t be able to give loans and issue credit cards, but can provide debit cards and Internet banking services. Essentially, they will mobilize deposits on behalf of other banks, acting as a business correspondent. Small banks, on the other hand, will offer loans. They have to give 75% of their loans to the so-called priority sector, and 50% of the loan portfolio should constitute small loans of up to Rs.25 lakh, even as they will be subject to all prudential norms like any other commercial bank. While payments banks will stick to their niche and try to take away other banks’ fee income and look for opportunities in the remittance space, successful small banks can graduate to universal banks after a few years.

By the time these new entities settle down, we will probably see a few wholesale banks, custodian banks and even investment banks to focus on new niches and lend depth and sophistication to India’s banking landscape, where the bond market is still not deep enough to meet the needs of long-term funding.

The bulk of Indian banks’ bad assets is in the infrastructure sector. Many had rushed to lend, often under pressure from the government, without understanding the risks associated with infrastructure financing. Besides, they didn’t have the long-term resources to support such loans. Wholesale banks can fill in this gap. They will be able to generate long-term funds and probably won’t be subjected to the reserve requirements such as cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

CRR, currently 4%, is the portion of deposits that banks need to keep with RBI on which they don’t earn any interest. SLR refers to the compulsory bond buying by banks, currently 21.25% of deposits. Such banks will also be exempted from priority sector lending—loans to agriculture, low-cost housing and small businesses. Currently, 40% of a bank’s loan must flow into these segments.

Some of the large non-banking financial companies that raise funds from the wholesale market and lend to corporations can become wholesale banks. A few foreign banks, too, will be happy to enter this space, even though they have reservations about local incorporation, which RBI has been pushing for.

Custodian banks don’t dabble in commercial and retail lending; they safeguard a firm’s or individual’s financial assets such as stocks, bonds, currency, commodities, metals and money market instruments like commercial papers. They arrange settlements of sales and purchases, ensure delivery of securities and offer accounting, legal, compliance and tax support services to customers such as commercial banks, insurance firms, mutual funds and pension funds in multiple jurisdictions around the world.

Unlike commercial banks, which offer loans using cash deposited with them, custodian banks can lend securities. Currently, Clearing Corp. of India Ltd provides guaranteed clearing and settlement functions for transactions in government securities, foreign exchange and derivatives as well as money markets, while there are two depositories—National Securities Depository Ltd and Central Depository Service (India) Ltd. Once RBI issues the guidelines for custodian banks, clarity will emerge on the future of these entities.

Almost two decades ago, in the late 1990s, RBI pulled down the barriers between development financial institutions and commercial banks and encouraged universal banking—a model that makes a bank a one-stop shop for all banking products. The experiment has not succeeded. Government-owned banks, with close to 70% market share of banking assets, have piled up bad loans due to their lack of expertise in project financing even as the share of foreign banks has been shrinking due to their failure to face the challenges in the Indian market and troubles overseas. A handful of new private banks cannot meet the diverse needs of Asia’s third largest economy. And anyway, they have mostly focused on retail business.

India needs more banks of different shapes, sizes and business models. The banking regulator is responding to this need. At the same time, it is also trying to de-risk the balance sheets of state-run banks. The consolidation move, if it succeeds, will lead to larger but fewer universal banks. Many more, relatively smaller banks offering specialized services will complete the landscape.

Sun Capital

Cross-currency trading: taking the next steps forward

This is a milestone in financial liberalization and perhaps a step towards making India a South-Asian hub for financial markets

The Reserve Bank of India (RBI) first announced its intention to allow cross-currency derivatives last September. Not many paid attention, except perhaps the exchanges and some intermediaries. While everyone thought it would take a year or more to operationalise, RBI and the Securities and Exchange Board of India (Sebi) moved with speed and are set to launch cross-currency derivatives trading in three of the most liquid pairs in the world—US dollar versus euro, British pound and Japanese yen. To facilitate trading, the cross-currency derivatives markets will be open from 9 am to 7:30 pm, so as to cover Japanese and European market timings and the first hour of the US markets.

This is a milestone in financial liberalisation and perhaps a step towards making India a South-Asian hub for financial markets. It is not often that an entirely international product is allowed to trade on our exchanges. In fact, it is a message that relevant products of all hues will be listed in India, so as to attract all stakeholders and participants to make India a world-level market. Over the years after electronic trading was introduced, the expanded product line is impressive—demat, futures, options, commodities futures, currency futures, interest rate futures and now this.

Significantly, a lot of the technology is already in place. With ready infrastructure and a close association between the RBI and Sebi, it is inevitable that more such steps are on the anvil; we have already seen the move to allow foreign direct investment (FDI) in commodity broking.

Is it also an allied effort to finally free-float and internationalise the rupee? Perhaps inspiration has also been taken from China, which has determinedly focused on internationalising the yuan, which has seen its active trading turnover increase four-fold. But this will require a two-way endeavour. Not only will we have to promote cross-currency trading in India to attract global traders, we will also have to head to the world’s largest currency trading playground—London—and work our way into that circuit so that the rupee is actively traded. It also means stocking up our foreign exchange reserves, which we have been doing.

There could be immediate benefits to the domestic trade. Intermediaries stand to benefit from the new product as it will strengthen currency futures and options (F&O) as a revenue line. It also uses the existing dealing set-up and the employees are already familiar with the products. Only brokers’ research teams will have to master the global currency pairs and put out trading recommendations. Not a big task, yet something to work on as trading multiple assets can get complex. Specialist currency research analysts will be required to decipher global and country-specific business cycles and factors.

How other assets like commodities are faring will also affect this as much as exchange rates affect commodity prices. In case of commodities, the impact of release of economic data from several countries can have tremendous impact on a range of currencies. Witness the continuous changes in the strength of the US dollar as every move by the central banks of the US, the UK, Europe and Japan is analysed. There are many such determinants; as I said earlier, it gets complex. And so there is money to be made.

For clients, it is a new trading opportunity. It also allows full price linkage between asset classes. For example, the price of gold in US dollars primarily depends on the strength of the currency versus the euro. It also reduces one leg of the transaction for traders who, till now, had to synthesise two currency pairs to create the dollar-euro pair. With abundant real-time information available online in these pairs, and market timings designed to capture overseas news flows, this is an ideal product for traders in pursuit of profit.

To ensure that end-users also utilise the markets and it does not become a ‘punters only’ segment, one important bridge still remains to be crossed. Since this market is not deliverable, unlike a position in a bank, the enterprise will have to ultimately convert its forex position back to the bank where there will be a rate differential from the futures or options prices. This will make hedging a challenge. The second test will be liquidity in contracts beyond the immediate months; something that still has to be successfully tackled in our existing commodity and currency markets.

We will also have to surmount operational challenges. Currency is traded 24 hours every day, starting Monday morning in Japan to Friday evening in New York. Trading continues on holidays as well. If there is a holiday in, say, the US, trading will still take place in the rest of the world.

Read in conjunction with the recently announced benefits to Gujarat International Finance Tec-City Co. Ltd, also known as GIFT City, Sebi’s growing responsibilities, FDI in commodities broking, and trying to get interest rate futures off the ground (which is a necessity before the rupee becomes fully convertible), the big picture is clear. There are many ifs and buts, yet allowing cross-currency derivatives is a brave move with far-reaching consequences for the vibrant financial services industry in India.\

Sun Capital

No trust, K Raheja readying stake sale

Players evaluating this transaction include GIC, Asendus, Brookfield Asset Management, Canadian Pension Fund, Kotak and Macquarie. Senior officials of the K Raheja Corporation declined to comment on the story.

The CL Raheja-promoted K Raheja Corporation, one of the main contenders for a real estate investment trust (REIT) listing, is now looking to divest a 20% stake in its commercial or income-generating office portfolio, sources close to the development told FE. The firm’s assets will be regrouped such that the commercial and residential projects can be run as different entities. A holding company called Mindspace, the group’s flagship project, will now house a pool of the commercial properties and will be structured to make room for an institutional partner. While talks with some leading private equity (PE) funds are on, FE could not ascertain the exact valuation of the transaction.

Players evaluating this transaction include GIC, Asendus, Brookfield Asset Management, Canadian Pension Fund, Kotak and Macquarie. Senior officials of the K Raheja Corporation declined to comment on the story.

A back-of-the-envelope calculation estimates the enterprise value of the holding company, comprising seven commercial projects, to be in the range of R12,000-14,000 crore. This assumes the area leased out under the Mindspace and Commerzone brands is approximately 23 million sq ft, according to data from a property consultancy firm. The valuation presumes a competitive 9% capitalisation rate that many experts say Grade A office buildings currently command and rental value ranging between R35 and R90 per sq ft a month. The projects are located in Mumbai, Pune, Bengaluru, Hyderabad and Gandhinagar. “In our estimate, we ascribed current rental values to projects under construction,” the consultancy firm said. As experts point out, the valuation would depend on how leveraged K Raheja is; FE was not able to access the details.

While industry experts such as Anish A Sanghvi, partner at PwC, point out that institutions are willing to pay more if they believe there’s promise of a REIT, K Raheja, although a prime candidate, appears to be staying away from one for the moment.

 Not the Reit time

* K Raheja looking to divest stake in commercial portfolio
* Co has about 20 m sq ft in markets including Mumbai, Bengaluru, Pune, Hyderabad
* Co to consider REIT listing after institutional funding

Incidentally, DLF has also restructured its business and is looking to sell a 40% stake in its commercial property outfit.

Experts say with the regulatory support in place, real estate players will look for institutional partners before they list. Meanwhile, institutional funds are looking for lucrative commercial portfolios to buy into and in the past couple of years, funds like Blackstone and Qatar Investment Authority have partnered with Embassy Developers and RMZ, both Bengaluru-based companies with primarily commercial assets. Others like CPPIB and Asendus too have tried to lock into partnerships. More recently, Milestone, Brookfield, Macquaire and even domestic players like Piramal and Kotak are hunting down commercial portfolios on the back of sustained, strong absorption data and rising cap rates.

Sun Capital