Tag - Mergers & Acquisitions

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04 Apr

CitiBank acquisition provides access to an affluent client base: Axis Bank

Update on the Indian Equity Market:

On Monday, NIFTY crossed the 18,000 mark to settle at 18,053 (+2.2%) aided by the surge in HDFC twins post the announcement of the merger of HDFC Ltd into HDFC Bank. HDFCBANK (+9.8%), HDFC (+9.1%), and ADANIPORTS (+4.1%) led the stock gainers. INFY (-1.1%), TATACONSUM (-0.4%), and TITAN (-0.2%) led the laggards. Among the sectoral indices, FINANCIAL SERVICES (+4.6%), BANK (+4%), and PRIVATE BANK (+3.9%) led the gainers and there were no sectoral losers.

Excerpts of an interview with Mr. Amitabh Chaudhary, MD & CEO, Axis Bank published in Economic Times on 1st April 2022:

  • Axis bank acquired Enam Financials, which was renamed Axis Capital. It is the number one player in the equity capital markets in India and is expanding business in the brokerage and M&A segments. Axis Capital will also benefit from the One Axis strategy.
  • Axis bank was distributing Max Financials’ products for over 10 years, so its acquisition provided an opportunity to sign up for a long-term deal and strengthened the partnership with Max.
  • Citi bank’s retail portfolio acquisition was in line with Axis bank’s strategy of granularizing retail business and premiumisation of the portfolio. The acquisition will create opportunities and synergies that will accelerate the journey to creating a franchise across the country.
  • The acquisition provides access to one of the best affluent consumer franchises in India and Axis bank will get access to salary accounts, 1600 plus corporate accounts, and Suvidha corporates. Axis bank will also gain 3,600 Citibank employees. There are a lot of interesting parts which will strengthen Axis Bank’s franchise.
  • The CEO believes they have structured a transaction where the Bank is protected from customer attrition.
  • The price paid for the transaction was approved by the Board. The transaction took slightly longer because it was a complex one. As it was a purchase of a portfolio, he believes it was better that some of the complications were discovered upfront rather than during the transition process.
  • It will take about nine to twelve months to get all the regulatory approvals. It will take time to get customer consent, which depends on the agreement customers have with Citibank. From there, it will take 18 months to transition every Citi customer to Axis’ platform.
  • Right now, wholesale banking has been muted due to muted credit growth. Axis bank wants to be careful about giving loans at prices where the NIMs doesn’t make any sense. Overall, he believes there is a lot of work that can be done on the wholesale banking franchise.
  • Axis bank’s balance sheet gives it the flexibility to fund Citi India’s consumer purchase through balance sheet liquidity, external capital, or a combination of both. The impact will be 230bps on the CET ratio. Though the resultant CT-1 ratio will be above regulatory requirements, the Bank may consider raising capital in the future.
  • A very important part of any merger of this size is how to execute that merger. The integration management committee has already been formed and some of the important considerations in that plan would be around customer attrition, staff attrition, technology transition, and also getting benefits in terms of ensuring that Axis bank can cross-sell more to the Citibank customers.

 Asset Multiplier Comments

  • We believe the deal will add to Axis Banks’ competitive positioning across the credit cards and wealth management segments.
  • The value accretion from Citibank’s portfolio in the long term depends on Axis Bank’s ability to retain and continually add customers as well as employees and its ability to up-sell and cross-sell. The deal is fairly small compared to the size of Axis Bank’s balance sheet.

Consensus Estimate: (Source: market screener and investing. in websites)

  • The closing price of Axis Bank was ₹ 784/- as of 04-April-2022. It traded at 1.9x/ 1.7x the consensus book value per share estimate of ₹ 417/ 474/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 943/- implies a P/BV Multiple of 2x on the FY24E book value per share estimate of ₹ 474/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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22 Mar

Acquisitions to lower EBIT by 45-50bps in 1st year – PERSISTENT

Update on the Indian Equity Market:

After a volatile session on Tuesday, NIFTY settled at 17316 (+1.2%) near the day’s high of 17,334. IT (+2.0%), OIL & GAS (+1.9%), and AUTO (+1.2%) were the top sectoral gainers. REALTY (-1.0%), CONSUMER DURABLES (-0.7%), and PHARMA (-0.3%) led the sectoral losers. Among the NIFTY50 components, TECHM (+4.2%), BPCL (+3.0%), and TATAMOTORS (+3.0%) led the gainers. HINDUNILVR (-2.9%), NESTLEIND (-2.7%), and BRITANNIA (-2.2%) led the losers.

Excerpts of an interview with Mr. Sandeep Kalra, CEO and ED, Persistent Systems (PERSISTENT) with The Economic Times on 21st March 2022:

  • PERSISTENT recently acquired MediaAgility, which is recognised as a Google premier partner which is the highest level of partnership in the Google ecosystem. MediaAgility comes with seven different Google cloud specialisations, ranging from migration cloud, NetApp development, modernisation, security, etc. In terms of the industry verticals, MediaAgility has a presence in BFSI, healthcare, life sciences, media entertainment, and gaming.
  • Explaining the rationale behind the recently concluded acquisitions, the CEO suggested the enterprises had already started their digital transformation journey before the pandemic. These transformation journeys sped dramatically during COVID, and hyperscalers have taken notice. They’ve been releasing more services, including vertical-specific offers, at an increased rate nearly every month.
  • The hyperscalers – IBM, Google, AWS – are expected to play an incrementally bigger role in the enterprise journey. PERSISTENT is already present in these segments, with revenues over USD 100mn. The recent acquisition of Data Glove added to PERSISTENT’s capabilities on the Microsoft Azure cloud technology.
  • With the MediaAgility acquisition, the Company intends to increase its presence on the Google Cloud Platform. Each of the platforms has their own niches and own customer base and PERSISTENT is trying to be the Uber of the cloud services for its customers.
  • Whenever an acquisition is done, there is a cost of doing it, and the Company expects a 45-50bps hit on the EBIT in the first year. The Company is confident of the acquisition being margin accretive once the integration process is complete.
  • PERSISTENT has established its footprint in BFSI, and healthcare life sciences and has 35plus enterprise customers across the US, India, and the UK. MediaAgility has a delivery centre in Mexico which complements PERSISTENT’s footprint in Guadalajara, Mexico. The acquisition will add over 500 cloud engineers with significant Google-certified capabilities.
  • The Company is following a strategy of bolt-on or tuck-in acquisitions and these would be in areas where it wants to expand its capabilities or expand its geographical footprint.
  • The overall demand environment is continuing to be healthy and over the last 12 months, PERSISTENT has announced deal wins in terms of an ACV of USD 882 mn and in excess of USD 1.1 bn in TCV terms. This Is a fairly healthy run rate in terms of the order book. The overall demand environment is good and PERSISTENT is building a capability that will last irrespective of the demand environment.
  • The revenue growth is expected to be healthy due to strong order bookings. The EBITDA margin is expected to be in the 16-17% range. The Company is looking to grow its capabilities and acquire market share.
  • In terms of long-term aspirations, the Company intends to improve its margin by about 2-3 percent over the next two to three years.
  • Attrition is one of the headwinds to the Indian IT sector. The Russia-Ukraine crisis is expected to increase the pressure on Indian talent.
  • In terms of tailwinds, IT services have a better pricing power compared to commoditised services. PERSISTENT being a specialised technology services company has a little better pricing power.
  • The Company has done multiple acquisitions in the last 12 months, with a capital commitment of over USD 220mn over the next few years. For now, it will take a little pause and focus on integrating the acquired companies. Should there be an opportunity in Eastern Europe, the Company would pursue it over the next 9 – 12 months.

Asset Multiplier Comments

  • PERSISTENT has completed 4 acquisitions in FY22 to strengthen domain capabilities in IBM Cloud, Microsoft Azure, Google Cloud. These acquisitions have helped increase the Company’s presence in verticals like High Tech, BFSI, and Healthcare and bolster near-shore and on-shore presence in North America.
  • IBM has been PERSISTENT’s partner for over 25 years, contributing over 25% to the total revenues in FY21. Alongside addition in domain capabilities, these acquisitions have helped reduce the concentration risk.

Consensus Estimate: (Source: market screener website)

  • The closing price of PERSISTENT was ₹ 4,532/- as of 22-March-2022. It traded at 41x/ 34x the consensus earnings estimate of ₹ 110/ 132/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 4,682/- implies a P/E Multiple of 35x on FY24E EPS estimate of ₹ 132/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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13 Oct

Demand to bounce back as festive season approaches – Dalmia Bharat

Update on the Indian Equity market:
On Monday, Nifty50 ended marginally higher at 11,931 as the Finance Minister announced fiscal stimulus measures. Among the sectoral indices, IT (+1.7%), PHARMA (+0.9%), and FMCG (+0.3%) were the only gainers while MEDIA (-2.4%), PSU BANK (-1.7%) and REALTY (-1.1%) led the losers. Among the stocks, INFY (+2.9%), ITC (+2.7%), and UPL (+2.0) led the gainers while BHARTIARTL (-2.8%), JSWSTEEL (-2.7%), and GAIL (-2.6%) led the losers.

Excerpts of an interview with Mr. Mahendra Singhi, MD and CEO of Dalmia Bharat with CNBC TV-18 which aired on 12th October 2020:
• The cement sector is on the path of revival. September demand vs the previous months of July and August is much better.
• The rural areas are showing good progress due to better economy or better policies from the government. The demand is increasing on a month-on-month basis.
• Both the urban and rural areas have shown good demand in the month of September as labor issues are being sorted. Sufficient steps to ensure the safety of the people have been taken. Now, the fear is reducing and people are assuming this to the new normal and working.
• Festival season is around the corner and demand is expected to bounce back.
• There was a 10% decline YoY in the months of July and August. September was 3-5% lower than a year ago.
• The cement sector is a localized business. Demand has been good in certain regions such as the North and Eastern parts of India due to a higher percentage of rural markets in those areas. Part of Southern states are still facing challenges.
• He expects the month of October 20 to be better than October 19.
• The company has completed the acquisition of Murali Industries. The revival activities for Murali industries has started and is expected to take nine months as the company was closed for a long time.
• The acquisition of Murali Industries and capacity addition at two plants is expected to increase the total capacity to 33,000 mn tonne by March 21.

Consensus Estimate: (Source: market screener website)
• The closing price of Dalmia Bharat was ₹ 790/- as of 12-October-2020. It traded at 36x/ 25x/ 13x the consensus earnings estimate of ₹ 22/ 31.4/ 60.2 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 959 implies a PE multiple of 16x on FY23E EPS of ₹ 60.2/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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10 Jan

‘Pricing is not an issue because we have hit rock bottom and it can only get better from here. It cannot get worse than this’ – Ravi Vishwanath, CFO, Teamlease

Update on the Indian Equity Market:

There was optimism in the global markets after US President Donald Trump’s comments on the Iran conflict eased worries. On Thursday, Nifty50 ended 1.6% higher at 12,216. Nifty Realty (+2.7%), Nifty Auto (+2.7%) and Nifty PSU Bank (+2.4%) were the top gainers among sectoral indices. Nifty IT (-0.2%) was the only sector that ended the day in the red. Among the stocks, JSW Steel (+5.9%), Infratel (5.4%) and Tata Motors (+5.4%) were the biggest gainers while TCS (-1.6%), Coal India (-1.1%) and HCL Tech (-0.8%) ended in the red.

‘Pricing is not an issue because we have hit rock bottom and it can only get better from here. It cannot get worse than this’ – Ravi Vishwanath, CFO, Teamlease

Excerpts from an interview with Ravi Vishwanath, CFO, Teamlease with ETNOW on January 8, 2020:

  • Talking about the outlook on the staffing business, he says they expected a better offtake in the general staffing business but some amount of slowness has percolated into Q4 from Q3.
  • The pipeline continues to be strong and they are hopeful on the deals they are pursuing.
  • There is still nervousness in the market. Temporary staffing is still okay as people expect things will be getting back to normal sooner rather than later.
  • On the productivity front, they are working on multiple projects on the tech backend. Their focus is on these backend IT projects, which are expected to contribute to productivity soon.
  • Some one-time charges had impacted the company’s margins in H1. They do not expect those charges in H2, so margins will be on similar lines as seen in the past.
  • When asked how has the acquisition of IMSI, a company focussed on infrastructure management, he said that they basically complete the portfolio of services that Team Lease has to offer in the IT staffing space. With the acquisition complete, they are now focussed on integrating all the services under a common leadership at the backend.
  • They have exited 75-80% of the margin dilutive projects they entered into last year and are hopeful of exiting from the others before 31st March. Then, they expect telecom margins to be back to 4-5% like what they were in the past.
  • There is some interest with companies for telecom staffing, which is a good sign for the telecom staffing business.
  • Since there are no entry barriers in the highly fragmented industry, there has been a lot of new entrants. However, there are huge barriers to scale in this industry. That is why there aren’t many companies with more than a 50,000 headcount. TeamLease operates with all organised players and there aren’t many smaller companies that have been able to reach that scale.
  • Since they work with recognised names, pricing does not seem to be an issue and he is hopeful that it can only get better from here.

Consensus Estimate (Source: market screener website)

  • The closing price of TeamLease Services was ₹ 2,590/- as on 09-January-20. It traded at 45x/ 31x/ 24x the consensus EPS of ₹ 57.8 / 83.3 / 110 for FY20E/ FY21E/ FY22E respectively.
  • Consensus target price is ₹ 2,900/- which implies a PE multiple of 26x on FY22E EPS of ₹ 110/-
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