The banking turmoil in the US and UK is gnawing away at the growth of Indian IT firms. Yet, domestic IT firms are expected to make at least six to eight more acquistions, similar to the bid for Axon by Infosys Technologies and HCL Technologies, over the next 12 months as they try to shore up their top lines in a bid to meet their revenue guidance.
For instance, more than half of the 11 IT companies that provide full-year revenue guidance run the risk of missing their numbers (in dollars) this year, according to Credit Suisse analysts. Their new estimates are now at the lower end of guidance for Infosys and Satyam and below guidance for MindTree.
Among the large caps, they say that HCL Tech provides the highest downside, followed by Wipro and Satyam and TCS. Since economists believe the bottom is still a couple of quarters away, it could lead to an elongated period of slowdown for these firms.
The flip side, notes Sudin Apte, senior analyst, Forrester India, is that since valuations are low, companies such as Infosys and HCL will try "to buy the top line to meet guidance figures."
He adds: "We will be surely seeing more such acquisitions as companies see a dip in client business. Besides the SAP practice, the IT sector will see more such sizeable ticket acquisitions in verticals such as retail, healthcare, telecom, and media."
Moreover, valuations have dipped in the West on the turmoil, and they are good targets for IT majors sitting on cashpiles. For instance, India's second largest IT services provider, Infosys, has over Rs 7,500 crore (Rs 75 billion) as on June 30, 2008. HCL has around Rs 2,500 crore (Rs 25 billion) in cash.
"Opportunity of covering the gap expected in the financial guidance and lower PE multiples already given, there could be certain large-scale Western buy-outs that Indian software companies may opt for before March 2009," concurs Hanuman Tripathi, CEO & managing director, Infrasoft Technologies.
While the PE multiples of Indian software companies is already lower than last year owing to stock market conditions in India, for US-UK software companies, the multiples have dropped significantly and more sharply.
Another significant trend is the move of Indian IT firms to rise up the value chain -- to compete with the likes of IBM, Accenture and HP (EDS) -- with these buyouts, which give them "complementary skills, added capability besides business transformation (when IT becomes a critical part of the business model) capabilities," notes Apte.
The Axon deal, for instance, will help boost the revenues of Infosys Consulting, which has been stepping up investments, and hence has been in the red. Axon has almost 20 per cent of its revenue coming from high-end consulting and the rest from SAP implementation services.
The acquisition is expected to help Infosys improve its margin from the current 15-20 per cent as some of the work can be outsourced. It is also expected to increase Infosys' Europe business, which fell by 0.4 per cent due to client-specific issues, to record Rs 1,325 crore (Rs 13.25 billion). It, however, saw a 31.1 per cent year-on-year increase in revenue growth.
Axon will also bring around 2,000 people to the HCL Tech (or Infosys) fold. These are people with good capability in business consulting and transformation. Either company will get a local presence in Europe, which is important as it bids for more clients in the region.
The deal is important for both firms. If HCL Tech is successful in acquiring Axon, it will be catapulted to the 12th position in terms of SAP implementation globally. If Infosys counters the bid successfully, it will emerge as the 10th largest SAP player, concludes Nishant Verma, VP, Tholons Capital.
