Infosys Ltd. (INFO), India’s second-largest software developer by value, needs to make acquisitions to meet a goal of earning a third of its revenue from products in five years as clients delay new projects.
The company’s “aspiration” is to boost business selling banking products such as Finacle and WalletEdge, used to transfer money over mobile phones, from 6.1 percent of sales in the three months ended June 30, Chief Executive Officer S.D. Shibulal said. Infosys in July cut its sales forecast for the year that began April 1 amid weaker spending by customers.
Infosys, which has 151,151 employees, is targeting software products to help it reduce its dependence on writing customized code to boost revenue, said Ankur Rudra, an analyst with Ambit Capital Pvt. in Mumbai. The first Indian company to sell shares on the Nasdaq is open to purchasing a firm that’s a 10th of its size in revenue, Shibulal said. Infosys’s sales rose 22 percent to $7 billion in the year ended March 31.
“It’s about increasing our revenue share from non- commoditized areas,” Shibulal, 57, said in an interview at Bloomberg’s office in Mumbai yesterday, adding that boosting product revenue wasn’t in his plan 18 months ago. The company will this year “hire 35,000 people, if you continue on this path in about seven years we’ll be recruiting about 200,000 people. This is not a viable option.”
Infosys shares have dropped 14 percent this year, compared with a 16 percent increase at larger rival Tata Consultancy Services Ltd. The benchmark BSE India Sensitive Index has risen 13 percent. Infosys, based in Bangalore, rose 0.2 percent to 2,392.7 rupees at the 3:30 p.m. close in Mumbai.
“Infosys’s focus on growing its products and platform- based businesses is risky,” said Rod Bourgeois, a New York- based analyst at Sanford C. Bernstein & Co. “If Infosys were thriving better in its core services businesses, it would have less need for products and platform-based growth.”
Finacle, used by companies including Rabobank Groep of the Netherlands and Denmark’s Nykredit Group, accounts for the majority of Infosys’s product revenue.
The software has approximately 70 percent market share in India, Chief Financial Office V. Balakrishnan said in an interview in February. Revenue from the 15-year-old product rose 7.8 percent to $318.75 million in the year ended March 31, from $295.6 million the year before.
The company, started by seven people including Shibulal with $250 borrowed from their wives in 1981, is targeting emerging markets for its products and platforms including WalletEdge.
GlaxoSmithKline Plc uses Infosys’s marketing tool BrandEdge, which competes with Sapient Corp. (SAPE)’s SapientNitro, Accenture Plc (ACN)’s Accenture Interactive and a digital advertising suite from Adobe Systems Inc. (ADBE)
Reaching the company’s goal “isn’t going to happen overnight, unless we do an acquisition,” Shibulal, who took over as head in August last year, said. Infosys had a cash pile of 206 billion rupees ($3.7 billion) as of June 30, the largest among Indian software developers.
Buying a product company may be expensive, said Ambit’s Rudra.
“They will have to pay a massive premium to acquire anything of size and scale,” said Rudra, who recommends investors sell the stock. “One would imagine they would not be ready to spend as much, given their relatively conservative track record.”
In 2008, Infosys decided against pursuing a plan to buy Axon Group Plc for 407 million pounds ($644 million) after its bid was trumped by New Delhi-based HCL Technologies Ltd. (HCLT) In 2006, Infosys spent $115 million to purchase Citigroup Inc.’s stake in Progeon Ltd., a back-office service provider controlled by Infosys.
The company, which has missed earnings estimates for four of the past eight quarters, on July 12 said sales in the year ending March may rise to at least $7.34 billion, lower than the $7.55 billion forecast in April. In contrast, Tata Consultancy’s earnings lagged behind analysts’ forecasts twice in the past eight quarters.
Shibulal blamed the difference on Infosys’s portfolio and the company’s dependence on so-called discretionary spending by companies, which has slowed.
Customers are facing “a lack of confidence about where to invest,” Shibulal said. “I don’t see any events on the horizon which will build confidence.”
For the year ending March, Infosys has forecast dollar- denominated sales growth below an estimate of 14 percent expansion for the Indian information technology services industry by the National Association of Software & Services Companies.
“In our 30-year history, one year and one quarter doesn’t mean much,” Shibulal said. “You don’t go in and reassess the entire strategy of a corporation and what we have achieved just because of a couple quarters.”
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