Phaneesh Murthy, CEO, iGate Global Solutions said the company is doing well and that they will keep IT concerns in mind. Murthy added that the delisting is part of an overall capital cleanup process. Commenting on the IT sector he said that 2008 budgets are going marginally up to flat.
According to Murthy, the IT industry continues to be strong from a growth perspective. On the dollar-rupee concerns, he said they would start showing up in margin depletion a little later than anticipated.
Excerpts of CNBC-TV18’s exclusive interview with Phaneesh Murthy:
Q: Your shareholders will be trying to arrive at what is a fair price. What do you think you can deliver in FY09 in terms of earnings just to enable your shareholders to value your company well. Do you think it will be Rs 30/per share next year?
A; We are at a current run rate of Rs 7.25 which was what we did last quarter and if one annualize that, it’s about Rs 29/per share. We are continuing to grow so we think we will deliver slightly higher than that. We haven’t made any positive guidance, but from the numbers, one can see that margins are going up and the numbers look reasonably okay.
Q: What’s your own expectation in this case, the decision is not yours as the executive management of the company, but for the promoter who own the 80% plus. You probably will ask the question to your self as a shareholder of iGATE on whether you should be tendering or not. As a CEO, what is the fair price for iGATE 400 plus. You have to take the decision your self in few weeks time?
A: I think there are combination of factors, as you can clearly see, all IT stocks have been hammered because of the rupee dollar concerns and the slowing of the US economy of concerns. At the same time, our numbers are going up quite nicely.
If I look back, before this announcement and before the board meeting in October, our stock was near the Rs 250-260 range. I think we’ve factored in all of this and we have come up with some price. Clearly the price has been around the Rs 360 or 350 mark or thereabouts for the last couple of weeks now.
I think there are all these kind of factors which are going into our assessment. The parent company has it’s own factors in terms of budget, what they are thinking is the fair price etc, which we have not much visibility into it. Like you said, we are also participants and some spectators in this events.
The democratic process specified by Sebi is that all shareholders tend their stock at whatever price they want and that’s what we’ll also do.
Q: Even so, a couple of brokerages refer that the fair value is closer to Rs 420. In you conversations with the promoters how open are they to considering a price like that?
A: It’s difficult to say how open they are, because they are reasonably motivated to getting this transaction done, it’s part of an overall capital structure clean up which we have been wanting to do for sometime. We had two options whether to continue with the US listing or continue with the Indian listing. To that extent there is enough motivation to get the transaction done.
On the flip side, the amount of cash available on the balance sheet and what they think is a fair price is something that we have not been exposed to. If I look back at history, there is a six-month price and clearly there has to be a premium over the six-month price and that six-month price is looking fairly irrelevant right now.
I know that I have to also take a decision at to what price to tender our stocks at and I will do that in the next week or so.
Q: You might be in a more candid position to talk about what is happening in the industry? What do you read of the intense bearishness there is on this sector and the kind of concerns there are on the currency front. Is it over done, or do you think there are genuine problems for this sector over the next few quarters?
A; If I look back, in my assessment 2008 budgets are going marginally up to flat over 2007, so that’s good news overall. However, the challenge coming up in the immediate couple of quarters is that the 2007 fourth quarter run rate on spending budget is actually higher than the next years budget on an annualized basis.
What has happened is because in 2007 the IT spending went up over the year; the run rate of 2007 Q4 is actually higher than the run rate of Q1 next year. So to that extent, while the over all budget for the year is higher in 2008, from a run rate prospective, we are estimating Q1 on spending is lower. That’s probably what is putting a bit of pressure or bringing in little bit of bearishness.
But fundamentally, I think the industry continues to be reasonably strong. The outsourcing demand continues to be strong, customers continue to spread more and more of their IT budgets in India and do more and more services in India. So from that entire front, I would argue that from a growth perspective, from numbers perspective, one would not see too much of a problem as reported by many companies. That will be all right, so that’s not a concern.
On the dollar-rupee front, that is something which is going out ahead more than few quarters because most companies have hedged their positions for the 18-24 months in front like us. So I would argue that while it is a concern, it will start showing up more in terms of margin depletions little further out than many people are anticipating.
That’s my analysis, but if the rupee does end at Rs 38-36 to a dollar, the industry has to get a lot more productive and a lot more efficient. Employees also have to rise up to the challenge to try and figure out what they can do to make sure that they are equal participant in the fact that, they have so show their productivity at that 20% higher rupee-dollar parity than what was existing, may be 12 months ago.
Q: Have you spoken to any of your institutional holders at iGATE just to come back to the delisting. Would there in all fairness expecting any kind of a patience premium because you have made your shareholders wait a bit while you were going through that consolidation restructuring internally and just when the numbers start showing up, you are taking your stock out. Would it be fair on the part of the mutual funds who own your stock to say that for us who have been patiently holding out, don’t give me today’s price but give me a bit of premium above that?
A: We haven’t had any conversations with them, it’s really iGate corps place to actually have that conversation with them and not from the company management point of view.
But from an analysis we have found that many of the mutual funds who hold the stock are not very old shareholders. Some of them have invested in the stock less than 6 to 12 months ago and some of them invested in the stock for about two years.
To that extent I’m not entirely sure that they might want a patience thing, they might want a premium because the company is doing better, but that is a different issue altogether.
Q: Just one quick question on your observation on this whole reverse book process since you are in the thick of it. Do you think the modality is need to be tweaked a little bit. Why if lower price for example, which is quite meaningless, do you think a cap can be indicated by the parent who is making the offer to tell investors this is the price beyond which we don’t want to except shares and the chances of it going through are low. Would you have any other parameters guiding this reverse book principal?
A: I think the process of a floor price is reasonably a good one and it tries to protect the shareholders, I think the reverse booking is fairly a democratic process.
I think the one part of the puzzle which I just couldn’t figure out is, you have a board meeting, you announce it and then you have a shareholder meeting which is typically 3-4 weeks apart and then you make a public announcement. Now in that three to four weeks, there could be lot of speculative interest. My own take is that there should be some process by which that whenever the formal announcement is made you look back 6 months and take that as some kind of floor price, rather than wait for a future period where there could be high amount of speculative interest.
That’s the only one suggestion that I would try and come up with it, to try to figure out those 3-4 weeks gap between the board meeting and the decision taken at the board or calling of the EGM at the board meeting and then the general body meeting, where this resolution is passed. We need to figure out how to take care of that.
Q: You did indicate that if the offer doesn’t go through, the parent my consider other forms of consolidation. Right now, how high are chances of this offer going through because of the holding structure?
A; If one looks at it from multiple perspective, this is as ideal a case as you want for this kind of a buy back offer. Once you reach a 90% level, you can do a de-listing. 81.1% is already owned by the promoter, there is about 4-4.5% owned by key employees, another 5.5% owned by some institution and the balance 9.5-10% in the retail. So if you look at it from that perspective, because it is 81% versus a 50%-55%, to that extent it increases the probability of that offer going through dramatically more. I would be surprised if it doesn’t happen.
Q: One of your viewers has SMSd saying to ask you, in the interest of your children, not to tender the stock at less than Rs 425?
A: My kids would be quite happy to hear any higher price that we can get.
How has the stock performed? CNBC-TV18 Analysis reports...
The parent company is going to delist iGATE, the global Indian listed subsidiary via book building and they are fixing a floor price at Rs 288. If you take a look at how the stock has moved 10 days even before the announcement has come - at that time it was Rs 219 and the stock has given about close to 65% gain. After that it is trading right now close to Rs 360-370 levels. CNBC-TV18 has spoken to lots of analysts and the consensus arising is that the fair value, if done on the DCF method, the forward earnings could be anywhere between Rs 400 to 425. The 52-week high for the company has been Rs 432.
So if one looks at Rs 400 to Rs 425 band - we’ll be looking at 15 times forward earnings on FY09. Most analyst are expecting close to Rs 29 to Rs 30, which will be 15 times one and a half years forward earnings. How does it put vis-à-vis other peers - smaller peers such Mastek, Hexaware or even Patni, Aptech - all are trading below 10 times FY09 earnings. Tier I, the premium league is trading close to 19 and 20 times. So it will be midway between these two; you are giving the significant premium because they are listing also. Performance-wise iGATE has done a little bit better in the past two quarters; especially in this quarter, they have done better. Most analysts are expecting better performance going forward. If one takes a larger view going back and look at how they have performed over the past 12 quarters, they have been going through transition phase and most of them they have changed the way they have been working.
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