Infosys Plans to Use M&A to Hit $20 Billion in Sales

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Infosys COO U.B. Pravin Rao
Pravin Rao, chief operating officer of Infosys Ltd. Photographer: Namas Bhojani/Bloomberg

Infosys Ltd. plans to step up acquisitions and venture capital investments as it tries to more than double sales to $20 billion by 2020 amid a slowdown in the technology services industry.

The Bengaluru, India-based company is forecasting about $1.5 billion of that projected revenue will come through acquisitions with the rest from organic growth, Chief Operating Officer U.B. Pravin Rao said in an interview Monday at the company’s headquarters. Infosys is searching for deals to expand its geographic reach in Japan, Latin America and Europe and to build its expertise in health care.

Infosys brought in Vishal Sikka as chief executive officer from German software maker SAP AG last August in a bid to revive the company’s fortunes. It has been struggling with an industrywide slowdown in growth that has created challenges for companies from International Business Machines Corp. to Computer Sciences Corp.

“The industry growth rates are coming down and with the pace at which technology is changing, sometimes it takes longer for you to build capability internally,” Rao said. “It becomes a lot easier and probably inevitable for you, if there are ways and means to acquire the capability much faster.”

Since Sikka’s arrival, Infosys has made two acquisitions -- in March it spent $200 million on automation technology company Panaya Ltd. and on April 24 it announced a $120 million deal to buy San Francisco-based Kallidus Inc. The company, which had completed just $425 million of acquisitions over the five previous years according to data compiled by Bloomberg, has also created a $500 million fund for investing in startups.

‘More Aggressive’

Shares of Infosys fell 2.3 percent to 1,947.1 rupees in Mumbai. The stock has climbed 16 percent since Sikka took the helm, outperforming the 3.8 percent increase in the benchmark S&P BSE India Sensex.

“Many things we have done that probably we have not done as aggressively in the past,” Rao said. “It’s a combination of things. A new strategy, new thinking, and also it’s what’s happening around us which is also making us do things in a more aggressive manner.”

Some analysts including Diviya Nagarajan at UBS Group AG, who has a sell rating on the stock, see Sikka’s growth plans as being too ambitious. Achieving $20 billion in sales by 2020, would entail a significant challenge, with Infosys needing to spend at least $6 billion on acquisitions to meet the goal, the Economic Times reported May 8, citing Nagarajan.

An e-mail and a call to Nagarajan outside of office hours in Hong Kong weren’t immediately returned.

Information technology services companies globally trade at an average 4.7 times sales, data compiled by Bloomberg show. Infosys had cash and near cash of $5.2 billion as of March 31.

Sales Slowdown

“We see it as a vision statement and not an indicator of growth prospects,” Sandeep Muthangi and Nandish Dalal, analysts at IIFL Institutional Equities in Mumbai, wrote in an April 27 report titled “Still early for a leap of faith.”

The urgency to push for acquisitions is highlighted by a sharp deceleration in sales at Infosys.

Revenue increased 6.4 percent to 533.2 billion rupees ($8.3 billion) in the 12 months ended March, with growth slowing from an average 18.5 percent in the preceding five years. India’s second-largest software-services provider April 24 forecast sales in the year started April 1 will rise by a maximum 8.2 percent in dollar terms, missing analysts’s projections for growth of as much as 10 percent.

Infosys expects the new investments in startups to help strengthen its technology capabilities. The company, which has set aside $250 million each for domestic entrepreneurs and for firms outside India, has so far backed two overseas startups.

“With the pace at which technology is changing it is practically impossible for a single company to provide all the technologies that a client is looking at,” Rao said. “When we look at startups, many of them have interesting technologies” and over a period of time the firms Infosys invests in may become potential acquisition candidates, he said.

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