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Infosys' revised strategy to drive volumes cheers analysts

Last updated on: September 11, 2012 14:36 IST

Infosys' revised strategy to drive volumes cheers analysts

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Somasroy Chakraborty in Kolkata

Infosys' acquisition of Switzerland-based Lodestone Holding would provide the software firm respite from investors who have, for long, demanded the company tweak its strategy of walking away from deals that might dilute earnings. Investors have also demanded the company's unutilised cash balances be used to revive growth.

The company on Monday stated it would buy the Swiss consulting company for CHF 330 million (about $349 million, or Rs 1,950 crore) in cash.

The deal would strengthen Infosys' consulting and system integration practices and give the software outsourcer access to about 200 new clients, mostly based in the Euro zone, adding significantly to Infosys' list of about 700 clients.

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Photographs: Vivek Prakash/Reuters

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"We are positive on Infosys. The strategy seems to focus more on growing volumes, especially in Europe, where they (Infosys) have been losing out. The acquisition may dilute the company's margins in the near term, but it would pay dividend over a longer period of time. Infosys seems to be responding to the changing landscape of the IT (information technology) industry, where competition is intensifying," said Dhananjay Sinha, co-head (institutional research), economist and strategist at Emkay Global.

On valuations, analysts at Religare Securities say, "The deal looks reasonably priced, at 1.5 times 2011 sales and 2012 estimated price/earnings of 15-17 times, based on our estimates."

"Valuation-wise, the deal is a little on the higher side and the management has indicated the acquisition would not be earnings-accretive for the next 18 months. This marks a departure from its earlier strategy of not carrying out transactions that were earnings-dilutive in the short term. It bodes well for the company's growth," said Dipen Shah, head of fundamental research at Kotak Securities.

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Photographs: Reuters

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The Infosys stock, which remained choppy through Monday's trade, ended 0.60 per cent higher at Rs 2,511 on the BSE, compared with the Sensex's 0.10 per cent rise.

Analysts said the acquisition was in line with Infosys' aim of growing this business, as part of its 3.0 strategy, since Lodestone had clients across industries like manufacturing, automotive, life sciences, chemicals, and the consumer goods sector.

After the announcement, brokerage Prabhudas Lilladher maintained its 'Buy' rating on the stock, with a target price of Rs 2,850 a share. It estimates Infosys' consulting and package implementation revenues at about $1 billion, owing to the acquisition.

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Photographs: Reuters
Tags: Lodestone , BSE

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"Infosys has been looking for an acquisition from a long time to strengthen its presence in the consulting and package implementation domain. After losing out on the Axon acquisition, Infosys grew its consulting and system integration revenue at five per cent CQGR (compounded quarterly growth rate) over the last 20 quarters. We see this acquisition as a much-needed inorganic booster for the company," said Shashi Bhushan, analyst with Prabhudas Lilladher.

Operationally, the deal is positive. In a note released on Monday, Harit Shah of Nirmal Bang stated, "Lodestone's annual revenue per employee stands at nearly $255,000, which is at a 400 per cent premium to that of Infosys (less than $50,000 in FY12). Thus, the acquisition would help boost the proportion of non-linearity in Infosys' revenue, a critical aspect for any IT firm to sustainably and profitably grow its revenue base."

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Photographs: Vivek Prakash/Reuters

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Infosys expects to complete the deal by the end of October. At the end of the June quarter, the company's cash reserves stood at $3.24 billion (Rs 18,031 crore). Two-thirds of the payment would be made upfront, while the rest would be paid after three years, subject to conditions.

While some analysts peg Lodestone's FY11 revenue at $210-220 million, analysts at Religare estimate Lodestone's net profit margin at 8-10 per cent, lower than Infosys margins of about 25 per cent.

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Photographs: Savita Kirloskar/Reuters
Tags: Lodestone , FY11

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However, any immediate gains (addition to net profit) on account of the Lodestone acquisition would be largely offset due to the yield loss Infosys records on the cash invested in short-term instruments, analysts say.

"The acquisition is in line with Infosys' strategy of earning more revenue from high-end services, even as the actual financial impact is small. We tweak our FY14 earnings revenue and EPS (earnings per share) estimates upwards by 3.4 per cent and 0.9 per cent, respectively," said Nirmal Bang's Shah.


Image: Infosys campus
Photographs: Vivek Prakash/Reuters
Tags: FY14 , EPS , Lodestone

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