Year: 2007

Indian companies can now borrow only $20m offshore for use onshore; overall company cap at $500m remains but only for expenditure offshore. The RBI/government’s objective – stem $s into the market.

Higher loan demand, lesser liquidity, stable rates – 1] there should be some shift of loan demand from offshore to the domestic market; and 2] deposit growth should slow – we believe some offshore borrowing was being arbitraged into deposits. Both these developments should translate into 3] lesser surplus liquidity in the system, and a bias toward firmer rates – do not see them going up, but should arrest falling deposit rates and segment-specific lending rates.

This is probably a positive in the near term – higher loan growth, better liquidity balance and lesser offshore competition. Structurally however, it probably is a negative that the market is getting closed rather than opened up. Bank specific – the domestic-only banks – both private sector and Government, as relative beneficiaries. Banks with relatively large offshore operations – which are likely large investors in offshore Indian corporate players – ICICI, SBI and BOI, relatively disadvantaged in their international operations.

Wipro the IT company built on the model of differential wage is finding it hard to maintain margins post debacle of Dollar against the Indian Rupee. Growth is important and it is using its cash to acquire companies in FMCG space to IT and Business Consulting. Infocrossing has 900 employees in the US. [Will Wipro cut some staff or use them for different on site projects ? Currently Wipro, Infosys and MindTree have stopped Hiring and Training freshers for bench, which used to be the case earlier, indicating likely slowdown in Orders]

Kotak Research says, Wipro has announced an all cash acquisition of Infocrossing for US$600 mn (US$115 mn net debt and US$485 mn of equity). Infocrossing is a promising player in the IT data center and managed services operations. The acquisition is extremely expensive, the company has been valued at 2.6x ttm revenues and 14.5x EBITDA because of organic revenue growth of only 10-12% guided for CY2007 and single digit net margin.

The acquisition will likely dilute FY2008 EPS by 0.5% and FY2009 EPS by 0.8% on a non- GAAP basis. On a GAAP basis the FY2009 EPS dilution could be as high as 6%. Maintain Outperform but reduce FY2009 end DCF based target price to Rs 620/ share.

Update from Citigroup:
Citigroup in its research report after studying the impact of Wirpo’s acquisition has retained a BUY on Wipro with a target price of Rs 625.

Why it makes sense for Wipro to acquire Infocrossing ?
(1) Adds scale to IMS practice (~US$500 mn combined run rate for FY07); (2) Enhances Wipro’s offering in the total outsourcing space; (3) Adds to Wipro’s infrastructure in US with 5 data centers (~$250m of assets as per management estimate – $1000/sq ft); (4) Adds proprietary platform for integrated IT+BPO offering in healthcare segment.

Infocrossing adds to Wipro’s presence in IMS and enhances Wipro’s offering in the fast-growing Total outsourcing space. Visibility of telecom revenues is the key to the stock’s performance. Citi expects Wipro to report an EPS of Rs 23.37 and Rs 28.75 for Fy08 and FY09 respectively.