Jun 10, 2010|
All that cash with nothing to buy
HCL Tech and Axon. Tech Mahindra and Satyam. TCS and Citi Group Global Services. Wipro and Infocrossing, CITOS. Most top Indian IT companies have been in the news for big ticket acquisitions in the recent past.
One name is however missing from the list. Infosys being the number two player in the industry has been guarding its cash. Its unused cash balance (including liquid investments) at the end of FY10 stood at Rs 143 bn (almost US$ 3.2 bn). The only acquisition it made this fiscal was McCamish Systems. And the previous one was seven years ago. McCamish is a US based business process solutions provider acquired for a measly Rs 1.7 bn. This cost approximately 1% of Infosys's total cash at the end of the year!
Infosys's dividend payouts have averaged around 30% for the past 5 years. The massive pile of cash earns only 6-7.5% interest in fixed deposits. The company is currently running out of ideas to profitably utilise its cash. To achieve a push in revenues and access to new clients and geographies, tech companies have constantly been looking around for inorganic growth. Infosys is finally waking up to the fact that it needs to do the same.
It achieved a revenue growth of around 5% in FY10. The management has guided for almost 3 times this growth in FY11. We believe that it should deploy some cash towards acquiring a company with good valuations and strong fundamentals. This will benefit it in terms of sustained revenue growth.
There has been recent news that Infosys is planning for buyouts in a range of US$ 500 m (around 10% of its revenues). This is a good size as it will be easier to integrate a smaller company. The acquisition can be in any geography, preferably non-English speaking Europe across any vertical.
Too conservative for its own good
Infosys is a strong contender as an acquirer. But it is vehemently opposed to aggressive bidding. It dropped out of the race for Axon against HCL Tech in 2008. Then, it did not want to get into a price war. It wants to make a friendly acquisition of a company willing to be taken over. This can only happen in a distressed sale, where the seller needs cash quickly to pay off creditors. However, since most tech companies are cash rich, finding a distressed buyout opportunity may be tough. Though the current debt crisis in Europe may provide some options with low valuations, finding companies willing to be acquired will still prove difficult.
Infosys has reached critical mass organically. It has over one lakh employees and revenues close to US$ 6 bn. Speculation is rife about the company finally making an acquisition this year. Although it may have the cash, Infosys doesn't have the necessary aggression to get into a battle for quality assets. If any of the Indian IT majors or global players gets a whiff of which company Infosys is looking at, they will not hesitate to get into a bidding war. And since Infosys is opposed to hostile bids, it may lose out!
Infosys has top quality management and we believe any company that it gets into its fold will thrive. It may need to sacrifice its 30% operating margins a bit in the short-term for a European fit. But, in the long run a good acquisition will propel it much further.
More Views on News
Aug 2, 2017
A better than expected turnaround in performance results in a change in view.
Jul 27, 2017
Digital services drive growth for Wipro in 1QFY18.
Jul 14, 2017
Infosys starts FY18 on an encouraging note with a stable performance.
Aug 5, 2017
How to get exclusive insider recommendations from Ankit Shah.
Jul 14, 2017
TCS starts FY18 decently despite an adverse currency impact.
More Views on News
Aug 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 16, 2017
The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407