Analysts see the buyout is “right-sized” and probably “right-priced” for the domestic firm.
India’s second largest IT services provider, Infosys Technologies, is considered to be the bellwether of IT companies. However, it has been slow on acquisitions — the Axon Global acquisition for Rs 3,300 crore is only its third deal in three decades.
It’s making up for lost time, however, especially after vehemently scotching rumours of a likely buyout of the European consulting major — Capgemini. Indian IT companies have been facing stiff competition from the likes of global IT majors including IBM, HP (which bought EDS recently), Accenture and Capgemini.
All these IT multinationals are known for global delivery models (delivery centres across the world) and consulting prowess, which is crucial when it comes to clicking major deals.
Right price
Analysts note that the Axon deal is “right-sized” and probably “right-priced” for Infosys. This is expected to strengthen Infosys’ consulting business amid the global slowdown.
An analyst from a brokerage firm, who did not wish to be quoted, explained that the acquisition is a good fit for Infosys.
Consulting firms are generally valued at thrice their revenues, but the valuations have come down to twice the revenue levels as the markets are down. “Infosys seems to have got Axon at a fair price,” he avers. Even after this all-cash deal, Infosys will still have more than Rs 4,000 crore in cash.
Axon employs 2,000 employees, a topline of Rs 1,660 crore and net profit of around Rs 160 crore. The company has a cash reserve of about Rs 205 crore and services over 200 clients including the large ones such as BP, Xerox and PSL Energy.
The company derives close to 55 per cent of its revenues from Europe and about 40 per cent from the US, where it had made an acquisition in the past. The company also has a delivery centre in Malaysia consisting of 700 people.
Infosys employs close to 2,100 consultants as a part of its SAP practice, which contributes about a third of its enterprise solutions revenues. About 10 per cent of Infosys’ global revenue comes from enterprise solutions.
Infosys has over 100 clients in the SAP space, spanning over 20 countries. The deal will help boost the fortunes of Infosys Consulting, which has been stepping up investments and hence has been in the red.
The IT major’s consulting and packing revenues for the first quarter (April-June 2008) of FY09 stood at Rs 1,150 crore — a 30.9 per cent YoY growth and a 5.1 per cent sequential rise.
A boost in this business will help Infosys move up the value chain and reap higher margins. Almost 20 per cent of Axon’s revenues come from high-end consulting and the remaining from SAP implementation services.
The acquisition will help Infosys to improve its margin from the current 15 per cent to 20 per cent as some of the work can be offshored.
The deal is also expected to increase Infosys’ Europe business, which fell by 0.4 per cent due to client-specific (primarily, British Telecom) issues, to Rs 1,325 crore.
The business, however, saw a 31.1 per cent YoY increase in revenue growth. Axon will bring around 2,000 people to the Infosys’ fold. These are people with capability in business consulting and business transformation, notes Sudin Apte, Senior Analyst, Forrester.
“It’s a right-sized deal. Even if 15-20 per cent leave the merged entity, Infosys will still have a substantial number that will add value to its consulting and business transformation initiatives. Besides, Infosys will get a presence in Europe, which is very important as it bids for more clients in the region,” he adds.
Finally, faced with a US slowdown and sub-prime crisis which affected the BFSI segment — both major revenue earners for IT companies — most Indian IT service providers have been increasingly focusing on Europe for business.
For instance, TCS — India’s largest IT services provider — reported a revenue growth of 6 per cent each from the UK and European markets. The UK contributed about 19.5 per cent and Continental Europe accounted for 10 per cent of its revenues in the first quarter of FY09.
For Infosys, Europe contributed 27.3 per cent of its revenues for the quarter ended June 30, 2008 — from 26.8 per cent in the corresponding quarter in the last financial year. Similarly, Europe contributed 20.65 per cent to Satyam’s revenues in the first quarter of FY09.
