Infosys begins to appraise start-ups - Views on News from Equitymaster

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Infosys begins to appraise start-ups

Mar 4, 2000

Infosys has begun the evaluation of proposals for funding start-ups. The first proposal is from a group of employees for a product that is a comprehensive notification service for web users, which can be downloaded at www.onscan.com. A world leader in providing IT consulting and software services to Fortune 1000 companies, Infosys offers software services such as application development, re-engineering, software maintenance, Internet consulting and package implementation.

Infosys has been looking out for acquiring companies ever since it made an issue of American Depository Receipts (ADS). The company is flush with cash, with cash and cash equivalents amounting to Rs. 4.05 bn as at March 31, 1999 (Rs 61/share post split).

This is actually pulling down the returns on assets since its core business of software development yields anywhere between 25% to 30% margins. The company’s return an assets fell to 20% for the year ended March’99 from a level of 30% in the earlier financial year since the returns on investments are not as high as the returns from its core business.

The company has also been hampered by the limit of $ 100 m set for automatic approval for taking over companies abroad. It has asked for a blanket approval but that has yet to be approved. Hence the new strategy of funding start-ups which would help the company deploy cash as well as provide incentives for retention of its existing employees. If Infosys funds www.onscan.com is approved this would arguably be the first instance of its kind in India where a listed company has actually funded its existing employees’ start-up.

Market View:
Despite the stock trading at a historical peak, given the potential from acquisitions, overseas development and e-commerce thrust, the upside remains. Perhaps the only grey area could be a de-rating of the sector as a whole, which doesn't seem likely at the moment. It is for this reason that the analysts have flagged the stock as a ‘buy’.

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