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Infy: Investments for the future

Jun 20, 2001

On the face of it Infosys seems to have an unfortunate history with the investments it has made. In FY01 the company wrote off Rs 223 m worth of investments, up by a significant 218% compared to Rs 70 m in FY00. But the paradox is that considering the company's size and the tough market conditions, the only way the company can ensure high rate of returns (that it has shown in the past) is by growing inorganically. For FY00, the company had Rs 4.3 bn in cash, which was reduced to Rs 3.8 bn in FY01. Since, Infosys operates at margins in the range of 40%, the only way it can maintain its return on investments (ROI) is by investing back the money into the company or making acquisitions. Infact the company is estimated to have a capital expenditure of US$ 96 m (Rs 4,320 m) in FY01. The figure is expected to be US$ 80 m for FY02 (Rs 3,720 m). The amount is quite significant considering the tough situation that the software industry is going through. Infact for the year FY02 Infy plans to employ additional 2,000 people. It has been speculated for quite some time that Infosys is looking to acquire companies but nothing concrete has come through. But this step too is more of an eventuality and the question of is of when.

Infosys' investments in FY00 were Rs 138 m, which has grown by 161% in FY01 to reach Rs 341 m (including write offs). The investments made in FY01 amount to Rs 458 m approximately.

Investments Billing (Due)
US$ m Rs m US$ m Rs m
Purple Yogi Inc., USA 0.5 23.0 - -
M-Commerce Ventures Ltd., Singapore 0.4 18.0 - -
Asia Net Media BVI Ltd., the British Virgin Islands 1.5 69.0 0.4 19.0
CiDRA Corporation, USA 2.9 134.0 0.1 5.0
JASDIC Park Company 0.2 8.0 1.0 47.0
EC Cubed Inc., USA 2.8 131.0 1.0 47.0
Alpha Thinx Mobile Phone Services AG, Austria 0.5 22.0 0.3 15.0
OnMobile System Inc 2.0 89.0 -
Workadia LLC 2.2 102.0 - -
Total 13.0 596.0 2.8 131.0
As on 31st March, 2001

Infosys Investments in FY01 were in line with its tradition of investing in emerging technologies. Most of its investments have been with companies that deal with relatively new technologies like Alpha Thinx in the wireless Internet space, CiDRA is a developer of photonic devices of high precision wavelength management and control for next generation optical networks and M-Commerce is in the area of mobile Internet based transactions.

The huge write offs would raise question on nature of the investments. But the rationale behind the investments could be that the company's now needs to move into the technology space. Infosys traditionally has been more dominant in the business application software space. The problem with this segment is that is has a low entry barrier. Therefore, the competition is very intense. For example Infy's portfolio is dominated by the banking financial services and insurance (BFSI) vertical. Almost all the software companies in the country have interests in this area. Though Infosys has developed a strong brand name, it is now consciously moving up the software value chain. The company has been consciously trying to move into the consulting space and has been positioning itself as a consulting services provider.

An entry into the technology domain with the advantage of its size would insulate the company from competition to a certain extent, and thus add pace to its growth. However, due to the relatively new nature of the technologies theses companies do carry a high risk and Infosys had already suffered. But the company did get billing worth Rs 230 m (US$ 5 m) from EC Cubed and Rs 66 m (US$ 1.4 m) from Alpha Thinx.

All the software companies are saying that the clients have become a lot more cautious while paying for IT projects. Therefore, software companies will have to come down to more realistic pricing. However, in future the low cost value proposition will be very difficult to sustain. Therefore, the value proposition needs to be changed. These investments that amount to just 2% of the revenues of Infosys in FY02, might be the premium that the company is paying to insure growth in the future.

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