BUY BACK Analysis : Tech Mahindra

 

Overview : 

These days we are seeing companies coming with the buyback offers. With investors seeing  negative returns in the broader markets over past 1.25 years, coupled with lower yield in fixed income funds these share buy backs seems like a prince charming riding the White Unicorn to redeem investors from the sin of equity investing; and providing the bailout. However, there is much more than the price that an investor sees in the buy back. This article covers share buy back offer of Tech Mahindra.

Understanding Buybacks :

A buyback allows companies to invest in themselves. Reducing the number of shares outstanding on the market increases the proportion of shares owned by investors. A company may feel its shares are undervalued and do a buyback to provide investors with a return. And because the company is bullish on its current operations, a buyback also boosts the proportion of earnings that a share is allocated. This will raise the stock price if the same price-to-earnings (P/E) ratio is maintained. The share repurchase reduces the number of existing shares, making each worth a greater percentage of the corporation. The stock’s EPS thus increases while the price-earnings ratio (P/E) decreases or the stock price increases. A share repurchase demonstrates to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles. (Source : Investopedia. )

Company Profile :

Tech Mahindra Ltd is an IT services and consulting company in India. It offers a variety of technology solutions and services in addition to business process services. The technology solutions include helping companies engage in cloud software, mobile solutions, network services, cybersecurity, and a variety of other options. The business process service is offered across various industries including telecom, financial services, retail, energy, hospitality, high-tech, agriculture, and food and beverage. The company's approach includes cost reduction, process optimization, and ownership through automation and productivity improvements. Tech Mahindra generates approximately half of its revenue from the United States.

Competitor Comparison & Analysis :

Tech Mahindra is a Large Cap growth stock with attractive P/E valuation at 16.33, along with the Price/Sales and Price/Book Value at 2.11 and 1.11 respectively. Its peers TCS and INFOSYS are overvalued at this point in time.

Price Vs Fair Value:

TechM is currently  trading at 8% premium at INR 799.30 over its fair price of INR 723.94, as on 15th March 2019. Between 2015 - 2017 it grossly under-performed the market and saw a good turnaround in 2018 & YTD with outperforming the market by 48.36% and 6.65% respectively. 

Valuation & Operating Performance : 

It has maintained the healthy Enterprise Value / EBITDA at 9.64 in 2018. Since 2017, TechM has steadily increased the RoA (Return on Assets) from 11.34% in 2017 to 14.28% on TTM (Trailing Twelve Months) basis. RoE (Return on Equity) saw improvement from 18.26% in 2017 to 22.81% TTM (Trailing Twelve Months) basis.

Dividend : 

There has been an increase in a health dividend increase over last 2 years, from DPS (Dividend Per Share) of INR 9 to INR 14. Trailing Dividend Yield and Dividend Payout Ratio has seen an increase from 1.15% to 1.94% and 21.74% to 30.26% from 2015 to 2018.

What turned good for TechM : 

• Growth across segments - enterprise business, communications, digital, telecom. 
• Multiple levers to trigger margin expansion. 
•  change in business mix 
• yield management 
• improvement in performance of portfolio companies 
• higher offshoring 
• automation benefits and 
• higher realization.
• The company’s valuations have nearly doubled in the past 18 months on the back of strong margin execution, and post the uptick from the announcement of buyback
•  There are some structural strengths in TechM’s business to drive much improved growth over the medium-to-long term: 
• Success in large deal wins and above-industry growth in the Enterprise segment is an encouraging indicator of improving competitive prowess. 
• Network management services have potentially expanded the addressable market for TechM, with directly addressable spend standing at ~USD40b. 
• TechM also has a sizeable scale in Engineering services, and the opportunity in the same can be leveraged, especially after the acquisition of Mahindra Engineering Services (MES).

What future holds for TechM : 

• Robust 5G opportunity to expand on. 
• Digital and Communication vertical would see enhanced momentum.  

What does a Buy Back Offer Mean :

As the company is having sound fundamentals and financials, the buyback would result in providing the boost to the company's financial profile. Further that, as the outstanding shares would reduce, the EPS (Earning Per Share) would increase, which would further reduce the PE ratio, which is good for the company. 

What are Tax Implications on the Buyback Offer : 

For buybacks that are not conducted through stock exchanges, that is, no securities transaction tax (STT) is paid, the long-term capital gains become taxable. The difference between buyback price and cost of acquisition is taxable as capital gains under section 46A of the Income Tax Act. Short-term capital gains are taxable according to slab rates, while long-term capital gains are taxed at 20% with indexation and at 10% without indexation benefit. 

The TechM Offer : 

The acceptance ratio of the buy back offer is around 20%, which turns out to be minuscule in proportion, to make any sizable impact. Further that, as we are seeing attractive future prospects for the company over medium term; thus, it is advisable to not opt for the buy back offer. 

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Impact of China's Slowdown on India

While Indian have been grappling with the volatility in Indian equity markets; where the broader segments  / markets have seen corrections, with even leading large caps down by 25% - 30%; our immediate neighbour, China, has already lost $3 Trillion in market value since January 2018 with 7.9% drop in Shanghai Composite Index.

While a layman, would infer that trade war with USA being the reason; however, this is just one factor. As we saw IL&FS defaulting on its repayment obligations in India; China's deleveraging campaign led to bond defaults of unseen magnitude. The whole scenario is further impacted by rising interest rates and strong US Dollar.

Many investors are thinking and interpreting the fall in Chinese equity market and economy as whole, being advantageous to Indian markets. However, this is not as simple and straightforward as it seems. Arun Jaitley, the Finance Minister, had stated that India is not a part of Chinese Supply Chain and Indian could become the "additional shoulder", supporting the global economy.  However, Dr. Raghuram Rajan differed from the opinion of the Finance Minister. 

Trade Aspect : 

India primarily exports chemicals, raw cotton, petroleum products & spices. Any slowdown in Chinese growth rate would result in the slowdown in demand for such products in China.

India majorly imports oil & other minerals; and slowdown in China means cheaper commodity prices. While on one hand this would benefit India; however, on other goods it might resulting in dumping of goods as slowing China means, more low prices of imported goods; as inventories would be building up in China due to slowdown.

Statistical Evidence :

As per Centre for Policy Research, India, the long - run elasticity of India's GDP to China's GDP is around 0.4, i.e., 0.5pp decline in Chinese Growth  would wipe off 0.2pp from India's Growth. Regression & Scenario Analysis led to startling fact; if China slows by 150bp, India's GDP Growth  would be negatively impacted by 80bp. 

It is a remote possibility that India would replace China as the manufacturing hub. Infact, India missed the bus during the tenure of NDA, led by Late Shri Atal B Vajpayee, who infact wanted to change the archiac labor laws, which he had to shelve the plans, as there was serious opposition from within and outside the coalition government.

Thus, while slowdown in China would impact us, but not to the great extent; however, it would not result in any such gain in terms of productions being shifted to India from China. The slowdoen in China would not be something to be cheered about, as it would deeply impact those countries whose trade relations are deeper with China.

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Dwarka sub-city residents prefer moving to larger homes within locality.

Dwarka sub-city is mainly an end-user driven market with the whole infrastructure up and running. It is well-connected with Metro Rail and airport, and a destination of choice for home buying.

We have seen a trend wherein, existing residents of Dwarka sub-city look for better and bigger apartments within the Dwarka sub-city itself. These are primarily the ones who are residents of the earliest launched societies in the area and are now looking towards societies with better maintenance and construction quality. In a way they are looking for upgrade. Those who are already residing in a 3BHK with twin car parking, power back-up, etc and are looking towards 3BHK+servant’s room with other things remaining the same.

We have seen good inventory available in Sectors 21 and 22 and now Sector 19B being a hot spot. The price range for the 1,500 sq ft, 3BHK apartment, with parking facility and power back-up in Sector 7, is Rs 95 lakh to Rs 1.15 crore, depending upon location of the society, infrastructure quality, internal maintenance and many other factors.

Is it the right time to buy?

For Dwarka-Gurgaon Expressway, this is the best time for the first-time home buyers, as they will not only get the property at discounted rates, but also may get further discount of 3-6 per cent, in terms of freebies. The charges like PLC (Preferential Location Charges) and club membership can be waived off, based on the level of negotiation and the type of property.

For Dwarka sub-city, we have seen the prices softening for the past six months, and there is no reason for delaying the decision now.

Is it the time to invest?

For Investors, Dwarka-Gurgaon Expressway still holds a lot of opportunities, provided one can spot the properties under distress. We have been seeing the quantum of distress sales and one can have a great bargain in these times, when short term real estate investors are exiting.

It is not recommended to go for investment in the said stretch as far as the newly launched or already launched properties are concerned as better options are already available. An investor could rather consider other alternative such as Sohna in Gurgaon and also Neemrana.

Neemrana provides the best point of price-entry that many have missed at the Dwarka-Gurgaon Expressway. This is backed by the whole infrastructural development that is coming up to support it, with Japanese city coming into existence along with many other international firms setting up their base.

Rajat Dhar, managing partner, Cogent Advisory

The views expressed in this article are the author´s own. This article was published on magicbricks.com and can be accessed here.

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Is Neemrana an investment opportunity?

It has been proposed that Neemrana, Shahjahanpur and Bahrod be included as three sub-metropolitan cities in the National Capital Region (NCR). Surprised?

Not all deserve enough to be included in the Delhi-NCR and hence, there would be strong rationale for that. Here, we will discuss what has led to this being proposed. Our analysis is for the perspective of the retail real estate investor, hoping to make decent returns over a tenure, with some odds in his favour.

In the current recessionary scenario where property prices are heading towards the downward spiral across cities, everyone is scouting for the best option to invest in the real estate space. In this scenario, there are two aspects that a real estate investor should keep in mind – ‘the price point of entry’ and ‘location & type of property‘.

Gurgaon in the Delhi-NCR space has always been on a real estate investment destination map. However, lately with the rising real estate prices and recessionary environment it may no longer be an ideal investment option available or even qualify for being in the first three choices for real estate investments. Amid such a scenario, a real estate investor has to take an objective and long term view of the real estate investment.

From an investment perspective, it is better to identify satellite towns or cities that are coming up around Delhi-NCR with promising prospects. We have heard about the Gurgaon-Manesar-Bhiwadi-Neemrana-Jaipur belt being developed. These satellite cities/towns can be seen as the Dwarka-Gurgaon Expressway of yesteryears, providing an ideal price point of entry. Here, I would cover Neemrana, the least heard about as an investment destination.

Till a couple of years back, Neemrana was known as the tourist destination only with Neemrana Fort attracting foreign and domestic tourists. However, change in the state government policies with respect to setting up of businesses and attracting foreign companies to set up businesses, turned the tide for Neemrana. This was also because the place was marked by the government for setting up of business and supporting residential units, not to speak about necessary infrastructure support that will come up to support both of them.

Here, we are considering the DMIC (Delhi-Mumbai Industrial Corridor), wherein it has been decided to include Neemrana and Kushkheda, in the first phase, with development of industrial townships here on the lines of Noida, Faridabad and Gurgaon.

Rajat Dhar, managing partner, Cogent Advisory

‘The views expressed in this article are author’s own’. The article was published at magicbricks.com and can be accessed here.

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Does Your Financial Advisor / Agent follow SEBI Circular on Risk Profiling..?

When was the last time your agent / or financial adviser conducted your Risk Profile...?
Do you know SEBI has issued guidelines for financial advisers and advisory firms..?
Is your bank or agent following those and educated you abut those guidelines..?

Financial Advisory is going a sea change in India, with SEBI having come up with new guidelines and refining of the existing one. There are separate guidelines for banks and Independent Financial Advisers and Wealth Management Firms.

The regulatory body had to take strict decisions in reference to the wealth management services being provided by agents, brokers and bankers. The backdrop of this could be found in our blogpost here.

The key changes have recently been done by SEBI is in KYC (Know Your Customer) norms, that would impact your savings and investments, if your adviser or agent is not adhering to the same.

So, What Does SEBI Guideline Say..?

This is in reference to SEBI Circular No. CIR/MIRSD/11/2012, and it says that:

• Intermediaries shall strictly follow the 'risk based due diligence' approach as prescribed by SEBI Master Circular on AML No. CIR/ISD/AML/3/2010 dated December 31, 2010.

• Also, Intermediaries will conduct on-going due diligence  based on Risk Profile and Financial Position of the client as prescribed in the master circular.

• These guidelines are applicable for both new and existing clients.

What does risk profiling actually mean..?
Each individual has different perception and appetite for the risk he can take in his investments. While as, some are aggressively investing in equities or stocks of companies, others are
only comfortable in fixed deposits or government bonds.

So, it is imperative that a process is followed that enables to determine the investor's preference to investing in the type of securities.

What agents are currently doing...?
Currently, it has been widely observed that investor invests in funds or securities as recommended by their agents, brokers and bankers. Now, there had been cases where regulators have noticed that certain products were sold to investors that were totally against the need of the client. These were the cases of mis-selling. And there was no way to prove the same. Now, client has to fill the risk profile and sign the dotted line.

What does it mean for client...?
As clients have to fill in the risk profile, they are now more aware as to whether they are conservative, moderately conservative, balanced, moderately aggressive or aggressive client. While client finalises his investments with his agen, he can cross check as to whether the fund or security he is investing in actually falls in line with his risk profile.

How are clients safer now...?
As per the guidelines, risk profile has to be documented and the same process has to be done once every year. If at any given point in time it is found out that the funds or securities recommended to the investor didn't fall in line with the risk profile or if there is the case of mis-selling; client grievances can very easily be resolved now.

This is the one step more in the direction of investor protection and in regulating the intermediaries. There are a whole set of guidelines that have to be adhered to in the investment management space; and those agents and firms who will not change are surely be moved out of the market by the regulator and the competition alike.



 

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Dwarka sub-city residents prefer moving to larger homes within locality

The article was published at MagicBricks.Com and can be accessed at: here.

 
Dwarka sub-city is mainly an end-user driven market with the whole infrastructure up and running. It is well-connected with Metro Rail and airport, and a destination of choice for home buying.

We have seen a trend wherein, existing residents of Dwarka sub-city look for better and bigger apartments within the Dwarka sub-city itself. These are primarily the ones who are residents of the earliest launched societies in the area and are now looking towards societies with better maintenance and construction quality. In a way they are looking for upgrade. Those who are already residing in a 3BHK with twin car parking, power back-up, etc and are looking towards 3BHK+servant’s room with other things remaining the same.

We have seen good inventory available in Sectors 21 and 22 and now Sector 19B being a hot spot. The price range for the 1,500 sq ft, 3BHK apartment, with parking facility and power back-up in Sector 7, is Rs 95 lakh to Rs 1.15 crore, depending upon location of the society, infrastructure quality, internal maintenance and many other factors.

Is it the right time to buy?
For Dwarka-Gurgaon Expressway, this is the best time for the first-time home buyers, as they will not only get the property at discounted rates, but also may get further discount of 3-6 per cent, in terms of freebies.

The charges like PLC (Preferential Location Charges) and club membership can be waived off, based on the level of negotiation and the type of property.

For Dwarka sub-city, we have seen the prices softening for the past six months, and there is no reason for delaying the decision now.

Is it the time to invest?
For Investors, Dwarka-Gurgaon Expressway still holds a lot of opportunities, provided one can spot the properties under distress. We have been seeing the quantum of distress sales and one can have a great bargain in these times, when short term real estate investors are exiting.

It is not recommended to go for investment in the said stretch as far as the newly launched or already launched properties are concerned as better options are already available. An investor could rather consider other alternative such as Sohna in Gurgaon and also Neemrana.

Neemrana provides the best point of price-entry that many have missed at the Dwarka-Gurgaon Expressway. This is backed by the whole infrastructural development that is coming up to support it, with Japanese city coming into existence along with many other international firms setting up their base.

Rajat Dhar, managing partner, Cogent Advisory

The article was published at MagicBricks.Com and can be accessed at: here.

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REIT: A new dimension to real estate investing - Part I

The article got published on MagicBricks.Com, and can be accessed at: here.

Wished to ride the real estate wave for harvesting better returns but have been put off by high real estate prices in India? Introduction of Real Estate Investment Trusts (REITs) in India could open up new avenues for you.

Traditionally, an investor intending to venture into real estate would scout for the best residential or commercial properties with an intention of growth or regular income from the real estate investment.

For majority of investors, rising real estate prices have put them out of the market. This adds on to the fact that the investment would also be limited to one or two properties, and thus in this case a ‘Real Estate Portfolio Management’ can not be executed in the truest sense. On the other hand, consider the case where you have invested in a real estate project in Noida, and the land on which the project is being constructed comes under dispute between landowners and builders (like the case in Noida extension). With Real Estate Funds, your investment is not placed into one single project and hence your investment basket is protected.

There is a silver lining amid these high real estate costs. The answer lies in Real Estate Mutual Funds (ReMFs), ReITs and Real Estate PE (Private Equity) funds. The real estate investment scenario got a drastic change with the sector getting opened for Foreign Direct Investment (FDI) in 2005.

While ReITs & ReMFs will take some time to get structured in India, Real Estate PE funds have already made their way in the said space. Some of the funds active in the market include Tata Realty and Infrastructure, Indiareit Fund Advisors, HDFC Real Estate Fund, ICICI Venture; ASK Property Investment Advisors, ArthVeda STAR Fund from DHFL and Kotak Realty Fund.

What are ReMFs and ReITs, and what differentiates one from the other?
ReITs are popular and prevalent in developed markets. They are listed on stock exchanges and governed by transparent norms. ReMFs invest in commercial properties and own them. They make gains by renting out or selling their holdings; like mutual funds and share profits with investors.

Real estate PE funds are, however, different. These funds invest in real estate projects by tying up with the developer, wherein the developer sells a portion of the project to the fund. Some funds tie up with companies also. These funds are primarily for HNIs, for real estate investment purposes.

The PE advantage: PE takes care of all the due diligence required for selecting the properties to invest into; and there is a specialised team that does the valuation, assessment and screening before investments can be committed to the project. Moreover, investors’ amount is spread out over multiple properties, so that diversification plays out well over here.

Rajat Dhar, Managing Partner, Cogent Advisory

The article got published on MagicBricks.Com, and can be accessed at: here.

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