India Inc went on a shopping spree in the UK last week

It's Twice As Nice

India Inc went on a shopping spree in the UK last week.While OVL agreed to buy Imperial Energy, Infosys gobbled up Axon. ETIG ploughed through the numbers to see how the deals stack up for Corporate India

IN ITS bid to expand its exploration asset base and secure future growth in production, ONGC agreed to acquire UK-based Imperial Energy (IEC) through its wholly-owned subsidiary, ONGC Videsh (OVL). The $2.58-billion deal has been accepted by the IEC management and is likely to be finalised over the next couple of months. Although the deal appears to be fairly valued, it will take another couple of years for the company to fully benefit from it.
IEC is currently a loss-making company, but its hydrocarbon reserves made it an acquisition target. It had reported a net loss of $43 million in '07 on sales of just $20 million. And considering its heavy capital expenditure on exploration activities over the next couple of years, it is not likely to earn positive cash flows till '10.
By end '07, IEC held proven and probable (2P) hydrocarbon reserves estimated at 920 million barrels of oil equivalent in 17 oil blocks in Russia and one block in Kazakhstan.
Nearly 95% of these reserves are in the form of crude oil with just 5% of natural gas, which will favour OVL due to higher crude prices.
IEC has drawn up ambitious exploration plans to boost its production. It will spend over $600 million over the next two years to raise production to 25,000 bpd by end-'08 and 35,000 bpd by end-'09. Just to put things in perspective, a 25,000-bpd production level will generate Rs 4,500 crore of annual revenues at the current crude price of $115 per barrel. The company has set a production target of 80,000 bpd by the end of '11.
With this buy, ONGC will gain a second foothold in Russia — particularly in the resource-rich Siberian region — after its 20% stake in Sakhalin project through OVL.
Considering ONGC's current production at around 983,000 bpd of oil equivalent, this acquisition amounts to an addition of around 2.5% to its next year's production.
Financing the acquisition won't be much of a concern, considering the fact that ONGC is carrying over Rs 16,000 crore in cash.
At present, there is no clarity on various important matters that will affect ONGC's net realisation on sale of crude oil from these fields. However, in '07, IEC's net average realisation stood at $33.35, which is nearly half of the global prices at $66 and is a definite cause of concern.
Similarly, among its various oil fields, IEC holds nine exploration licences, while only four licences allow it production rights. Thus, the exploration successes do not mean automatic right to production.
All these exploration licences will expire within the next 18 months and ONGC will have to secure the production licences separately if the exploration results in new discoveries. ramkrishna kashelkar
LAST WEEK, Infosys Technologies acquired the UK-based SAP consulting and implementation company, Axon, for $753 million. Though this is the biggest acquisition by a domestic IT company, the effect on Infosys's stock price was not significant. The scrip lost 0.35% the following day (Tuesday), compared to a gain of 0.22% for the Sensex.
The deal is expected to be completed by November '08. Hence, the impact of the deal on Infosys' financials in the current fiscal year will be limited. Assuming a growth rate of 25% in topline for Axon and no change in its operating margin, the company will contribute just over 1% towards the consolidated net profit of Infosys for FY09. Obviously, the impact on earnings per share (EPS) is negligible. But the full impact will be visible from FY10 onwards.
However, if Infosys is able to raise Axon's net profit margin by 500 basis points (bps) through offshoring and better deals, the acquisition will add nearly Rs 382 crore to Infosys' consolidated net profit in FY10. This will boost Infosys' bottomline by 5-6%, which is quite significant. However, this estimate is based on the assumption that Infosys continues to grow its topline at 22% and maintains its operating margin at the current level. As this is an all-cash deal, there will be a pro-rata change in Infosys' consolidated EPS.
In the short term, however, the deal will reduce Infosys' overall operating margin. Axon currently has 15% operating margin, compared to over 31% enjoyed by Infosys. This is likely to reduce the consolidated margin of Infosys by around 200 bps in FY10. In the long term, Infosys will try to improve its operating margin by increasing the offshoring component of Axon's operations.
Overall, the deal is part of the long-term strategy of Infosys to enter the consulting space. Infosys currently derives around 24% of its revenue from the consulting and package implementation business. And after this acquisition, the share of the same will grow by 1,000 bps to 34%.
Infosys will get access to a number of global customers spread across verticals like auto, telecom and pharma, among others. Infosys has a small presence in the business consulting space in Europe. Hence, this acquisition will help Infosys to expand its presence in that continent. santanu mishra

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