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STOCK INDICES
8401.9

0.23

28067.56

0.12

735

0.46

1982

-0.01

476

0.4

NIFTY
SENSEX

(%)

MSCI INDIA
MSCI EM
MSCI BRIC
MSCI WORLD
Values in US $, Gross

6411

-0.21
At 7 pm IST

OIL ($)

BOND YIELDS

DUBAI CRUDE
73.6

10-Y GOI
8.16

1.27%

0.00

Absolute Change

Gold Rate
PRICES PER TROY OUNCE ($)
US
India
OPEN

1183.10

1332.78

LAST*

1193.10

1331.52

*At 10.30pm, After adjusting for import duty,

Indian spot gold higher by $19.11 to US Comex
gold price on Thursday. The premium on local
gold is due to tight supply following import curbs.

FOREX RATE `-$ EXCHANGE RATE

OPEN

LAST*

62.04

61.95

HEARD on the Street

NSE Top Deck

Sees a Reshuffle
R Sundararaman,
the former chief of
products at NSE,
has joined Bank of
America as COO,
India. Sundararaman worked
with NSE since its inception and
became the exchanges senior
VP. An executive shuffle is taking
place at the senior level within
NSE. Those being moved include
VPs Suprabhat Lala, K Kamala and
Ravindra Mohan. Lala, who was in
charge of trading and operations,
will handle compliance. Kamala
will look into business development and Mohan into investor services and arbitration. Two officials
from PFRDA will join NSEs
regulations department as VPs.
PALAK SHAH

E C O N O M Y  1 7

LCC to Boost TechMs Global Play

No profitability gains expected in the short term, but US acquisition will offer long-term synergy

Calculus
Ranjit.Shinde@timesgroup.com

ET Intelligence Group: The acquisition of US-based Lightbridge Communications Corporation will help Tech Mahindra to
strengthen its presence in the
global market for wireless network design and deployment.
Considering that the telecom
segment constitutes half of Tech
Mahindras revenue, the integration will offer a long-term synergy
to the combined entity. In the
short-term, however, there may
not be any significant improvement in the consolidated profits

and profitability since LCC operates at a much lower operating

margin compared with that of
Tech Mahindra. In addition,
LCCs revenue size is smaller. After integration, its revenue would
be over 7% of the combined top
line of over $3.4 billion.
Lightbridge Communications
Corp (LCC), a privately-held US
company, claims to be one of the
largest independent network engineering companies in the world
offering network design, deployment, consultancy and solutions
to enhance network performance.
The deal is expected to be completed by the first quarter of 2015.
While the short-term benefits
are limited, there are a few factors that go in favour of Tech Mahindra. First, the deal doesnt
seem to be expensive. Tech Ma-

hindra has valued LCC at $240

million. LCC is estimated to report $430 million in revenue for
2014. This means Tech Mahindra
will pay just over half of the fullyear revenue of LCC. Deals in
the sector have traditionally
been valued at 1.5-3 times sales.
Another positive factor is that
Tech Mahindra will get an easy
access to over 5,000 network engineers of the 30-year old company
and to its more than 400
clients across geographies. This
should enhance Tech Mahindras offerings in the telecom solutions segment.
However, improving the profitability of the acquired business
will be an uphill task. LCC operates at around 8% margin compared with Tech Mahindras
FY14 margin of7 22.2%. In that

Smart Sourcing Spin

Brings Cheer to HPCL

Tech Mahindra
(indexed to 100)
200

Tech Mahindra
ET Infotech index

152.8
150

Net Profit*

HPCL
Indian Oil
BPCL

100
50

131.1
May 20, 14

Nov 20, 14

case, to bring LCCs margin at

par with rest of the business
should be a priority.
The deal will be funded through
internal accruals. Tech Mahindra had over $550 million in cash
and bank balance and current investments at the end of the September 2014 quarter.

Rising valuations weigh down FII equity flows, most raise allocations to Indian debt

Mumbai: Global Emerging Market funds and Asian (ex-Japan)

fund allocation to India have hit an
all-time high at 13.2%, as they have
increased their holdings by 2.8%
over the past one year. But this
doesnt necessarily mean good
news for India since global fund
managers consider this as an overweight position, which could be
fraught with risks.
FII flows have hit already speed
breakers with only $15.5 billion
flowing into Indian equities this
year so far, which is significantly
lower than last years inflows of
over $20 billon (2013), and $24 billion in 2012. Global fund houses
such as CLSA, UBS and BofA-Merrill Lynch have expressed concerns over Indias overweight
position which weakens the prospect of global fund flows.
Indias overweight position for
global emerging market funds is
at an all-time high, and this consensus of bullishness creates the

No Headroom?
FII Fund Allocation
GEM & Asia
(ex-Japan)

13.2%

FII Holding
Market
Free Float

22.5%
46%

Slowdown In FII Flows

2013
2014
2012
$20.1 b
$15.4 b
$24.3 b
Rich Valuations
(P/E Multiple)
INDIA
CHINA
17.1 times
8.8 times
BRAZIL
10.6 times

RUSSIA
4.9 times

166.6

-898.5

PL

464.2

-50.1
(**Y-o-Y)

Defying the Trend

HPCL

BPCL

IOCL

16

Overweight GEM Funds may

Pose a Risk to Indian Market
biggest risk to Indian markets,
said Jyotivardhan Jaipuria, managing director and head of research, BofA-Merrill Lynch.
Hence, much good news may get
negated by Indias overweight position in GEM funds, he added.
The foreign ownership in Indian
markets has also hit a record high:
FIIs are collectively holding 22.5%
of the market, and 46% of the free
float as of June 2014. This leaves
global fund managers little room
to invest in quality stocks.
The current mandate for
emerging market fund managers is to invest in Indian debt and
not so much in equities, as they
are already overweight on India, said Christopher Wood,
managing director and chief equity strategist at CLSA, in a recent interview with ET. Global
money will find Indian markets
if only markets see significant
correction from current levels. I
may also increase our fund allocations to India if stocks come
down significantly.
Among the EM pack, India managed to attract highest inflows

850.2

*For Sept 14 Qtr (`Cr)

PBDIT Margins (%)

12
8
4
0
-4

Biswajit.Baruah
@timesgroup.com

Growth
(%)**

worth $15.46 billion this year so

far, compared with other markets
such as Taiwan, which witnessed
inflows worth $13.54 billion, Brazil $9.96 billion, South Korea $6.7
billion, Indonesia $4.2 billion and
South Africa $2.58 billion. However, sustainability of fund inflows remains a worry. Its always difficult for investors to
push money into a market that
has already gone up a long way.
Our local team believes that Nifty
may rally 14-15% by end of next
year, while our house view is not
that bullish, said Geoffrey
Dennis, head, GEM equity strategy at UBS.
We like Indian companies, but
we have problems with the valuations as they seem to be
stretched, said Hugh Young,
MD, Aberdeen Asset Management Asia.
Fund managers say there are
headwinds that can impact fund
flows into EMs, including India,
such as a hike in interest rates,
the current recession in Japan,
de-acceleration of growth in Europe and a slowdown in China.

Sept 2012

Sept 2014

The 2.6 times jump in Hindustan Petroleums (HPCL) profit for the
July-September 2014 quarter has baffled investors and analysts alike
even as peers put up a rather muted show. BPCLs net profit dropped
over 50% while IndianOils bottom line slumped into the red zone.
This was on expected lines in view of the drop in prices of crude
oil and petroleum products, resulting in inventory losses for these
oil majors. Since inventory is valued at cost or net realisable value,
whichever is less, a drop in global oil price from $110 per barrel in
June 2014 to $85 by September-end 2014 resulted in a decline in
inventory value for these companies.
The secret lies in a new practice HPCL introduced while buying crude
oil from overseas suppliers. During the JulySeptember 2014 quarter,
the company took advantage of the fact that it was all a buyers
market and asked suppliers to price the crude oil cargo at a price at
a specific date a month later against the prevalent practice of using
the price on the date of loading. So, for the crude purchased in July,
the price of August would become applicable, and so on. This was an
indirect way of hedging, which was implemented selectively during
the quarter, said KV Rao, HPCLs finance director. With crude prices
falling steadily through the quarter, this strategy helped the company
limit its losses on oil inventories. On the other hand, in its marketing
division, it made gains on the inventory of refined products as the
market price of diesel at September end 2014 remained higher than
the cost. Part of HPCLs inventory gains were also due to the difference in inventory valuation methodology. The best part is that the
flexibility to shift back to the earlier pricing mechanism stays with
HPCL in case oil prices start rising again.

How Each OMC Evaluates Its Inventory

Method for Inventory Valuation
For Crude Oil

For Refined Products

HPCL

FIFO

FIFO*

IOCL

Weighted Avg

FIFO

BPCL

Weighted Avg

Weighted Avg

Company

*Other than lubricants

Source: Annual Reports of respective companies

Govt & Upstream

Support (Sep 14 Qtr)
HPCL

`5,154 Cr
Indian Oil

`12,184 Cr
BPCL

`5,043 Cr

Text: Ramkrishna Kashelkar; Graphic: Sandeep Patil