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Mahindra-British Telecom's first acquisition will open doors to new clients

With the acquisition of the $30 million Axes Technologies, Mahindra-British Telecom will be able to complement its capabilities in the telecom software vertical. The buyout will also open doors to new clients, and increase the share of business from clients other than JV partner British Telecom.

MBT will pay $54 million in cash for acquiring Axes, which is 1.8 times this fiscal revenues. The sales multiple is lower than what Patni Computer paid a year ago to acquire telecom services player Cymbal, which had over 500 employees. Patni paid about 2.1 times Cymbal's June 2004 revenues of $32 million.

MBT, India's eighth largest software exporter and a formidable service provider, will now be able to sell its products and services to equipment manufacturers and independent software vendors where Axes has a strong presence.

Axes provides solutions in R&D, product engineering and life cycle support. Its clients include Alcatel, Motorola, Coppercom and Nortel. Axes had over 850 employees with 10 per cent in the US and the rest in its development centres at Bangalore and Chennai. MBT has 7,500 employees at present.

Though MBT's sales grew 28 per cent to Rs 929.6 crore in 2004-05 over previous year, its net profit fell 24.5 per cent to Rs 71.09 crore. In the first half of 2005-06, there was an improvement as net profit rose 37 per cent to Rs 71.17 crore over the first half of 2004-05.

Mahindra & Mahindra, which holds 56.62 per cent in MBT, has been long toying with the idea of listing the company. That would help unlock value for M&M shareholders. The M&M stock closed 0.65 per cent higher at Rs 402, and is trading at an estimated 2005-06 P/E of 17 times.

Banking stocks gaining currency

While banking stocks have lagged the rally in the last one month (the Bankex has gained 2.8 per cent versus the Sensex gain of 4.8 per cent), they have been perking up in the last week or so.

Investors have probably been uneasy owing to the tightening of liquidity and rising interest rates and that banks may not be able to pass on the entire rise, given the competition. Indeed there is talk that some banks may get together to try and stop the undercutting that may be happening. That deposit rates have moved up, out of kilter with the overall interest rate in the system, is somewhat worrying.

Besides, even if banks borrow abroad, costs will be higher than they were six months ago, since interest rates have moved up overseas too. The other concern is that if interest rates move beyond a certain limit, investment portfolios of some banks could take a hit.

However, there is the brighter side. If demand for credit is rising, banks can use their excess SLR to give loans though they must ensure themselves a good spread. With distressed assets market getting a boost (FII investment is being allowed), banks can clean up their books.

Besides, if a bad asset which has been provided for, turns good with the economic situation improving, it would be an added upside. The second quarter numbers showed strong credit growth, especially to the retail segment.

While there may be short term concerns, if the economy continues to grows at a steady clip and there is demand for credit, banks cannot but do well.

Oil firms: Positive margin

Oil marketing companies (OMCs) such as HPCL and BPCL have seen a sharp revival in investor interest over the last few weeks, thanks to the cooling off of international crude prices. Brent prices at $54 a barrel are close to their three-month lows.

As a result, over the past one week, OMCs are estimated to have had a positive marketing margin of Re 1 a litre in the case of petrol and 30 paise for diesel, as estimated by oil analysts.

Under-recoveries (prior to subsidy sharing) in the case of kerosene is estimated to have come down to Rs 11 a litre. In contrast, in the September quarter, blended under-recoveries (prior to subsidy sharing) for auto fuels was estimated at Rs 3.5-4 for OMCs.

In the case of kerosene, under-recoveries (prior to subsidy sharing) was estimated at Rs 12-13 a litre, in the previous quarter. This burden had resulted in BPCL reporting a loss of Rs 199.3 crore in September 2006 quarter compared with a profit of Rs 471.1 crore in the corresponding previous period.

The improvement in operating environment has helped stocks of OMCs outperform the Sensex over the past month "" for instance, BPCL has appreciated about 10.55 per cent compared with a 4.75 per cent gain in the broader market. IOC, too, has risen about 10.84 per cent during this period.

Despite, the recent run, OMC stocks appear reasonably valued "" IOC trades at about 8.6 times estimated 2005-06 earnings, while BPCL is going at 9.8 times.

With contributions from Shobhana Subramanian and Amriteshwar Mathur