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Indian IT is 'cash'ing in - Views on News from Equitymaster
 
 
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  • Sep 16, 2009

    Indian IT is 'cash'ing in

    The inorganic growth space has seen a lot of buzz since the onset of economic downturn. It is estimated that with 34 US-based acquisitions, the Indian IT industry accounted for about 55% (by volume) of the US-based acquisitions during 2008. Companies from the healthcare, ERP and analytics domain were the main acquisition targets. While small and mid-sized companies like Rolta and NIIT Tech acquired to add service offering to their portfolio, the larger ones like 3i-infotech and Aegis BPO went inorganic in order to strengthen their current capabilities. The IT biggies also treaded this path in order to strengthen scalability, geographic presence and product offerings. While some acquisitions looked a little overpriced at the time of deal, synergies from these acquisitions have started showing in the financial performance of the companies.

    Acquirer Target Consideration
    TCS Citi BPO (India) US $ 505 m
    Wipro Citi Technology Services (India) US $ 127 m
    Tech Mahindra Satyam Computers US $ 500 m
    HCL Axon US $658 m
    CapitalStream US $ 40 m
    UCS group (ERP operations) US $ 8 m
    3i Infotech Regulus Group US $ 100 m
    Rolta Rolta TUSC Inc US $ 45 m
    WNS Aviva BPO business US $ 228 m
    Aegis BPO PeopleSupport Inc US $ 250 m

    Source: Company reports

    The biggest surprise in the acquisition space came from Tech Mahindra's multi billion bid to acquire scam-hit Satyam Computers. This shows of company's aggressive strategy to acquire scale in order to join the ivy-league of top Indian IT majors.

    Global downturn triggered these acquisitions in more ways than one. Firstly it made the valuations of the most of the target companies more realistic. As big MNCs felt the heat of slowdown, they hived off their non-core businesses. These businesses brought committed revenues and access to new clients for the acquirer. It also became a need of the hour as pure outsourcing deals went out of the vogue. Customers wanted all-round IT solutions for which companies amassed required skills inorganically. Big-ticket acquisitions also came with sourcing agreements which ensured revenue stream. For example Wipro's acquired Citi Technology Services with an agreement that the global bank will source services worth at least Rs 500 m from Wipro. All this is expected to aid Indian IT companies in climb up the value-chain by providing end-to-end development, IT consulting and enterprise software solutions.

    It is at this opportune time that internal cash accruals came handy as most of the Indian IT companies utilised the cash in their books to fund their acquisitions. And why not? Software, not being a capital intensive business, allows IT firms to stock a lot of cash in their bank accounts. The cash on books for the 5 major IT companies in India grew at a CAGR of over 62% over the last 5 years, while the total assets on their books grew at a CAGR of 37%. In other words, the companies were cash rich, with cash balances accounting for around 10% of their total assets. Infosys is an exception again, as it maintained over 40% of its assets in the form of cash and bank balances. However, it is worth noting that Infosys did not acquire any firm recently as it continued to invest in its own subsidiaries in China and Mexico, which are still in nascent stages.

    Source: Company Annual reports

    With so much of cash sitting on the books and so many acquisition targets trading at attractive valuations, we believe it is a prudent decision to buy during the downturn. After all, that is what value investing is all about. Hopefully all of these come to fruition soon, as the Indian IT industry braces itself for economic recovery.

     

     

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