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Infosys: An 'Expert' move!

Dec 23, 2003

In a move much awaited by the investor community, Infosys has 'finally' made an attempt towards growing its business inorganically. The company has acquired 100% stake in the Australian software service provider, Expert Information Systems, for a consideration of US$ 22.9 m. This acquisition by Infosys comes after almost a gap of 18 months, when the company acquired the intellectual property rights in Trade IQ, a treasury management product of IQ Financial Systems Inc. for US$ 3.5 m, to strengthen capabilities of its (Infosys') core banking product, Finacle.

Infosys & Expert: A snapshot
US$ m** Infosys Expert
Revenue 754 35
Employee costs 349 23
% of revenue 46.3% 67.5%
S,G & A expenses 113 4
% of revenue 15.0% 11.1%
PAT 195 5
NPM 25.9% 15.0%
** Data pertaining to year ending 2003 - Infosys (March), Expert (June)
Expert is one of Australia's leading IT service providers and caters to telecom, banking and financial services (BFSI), retail and government verticals. Apart from benefiting Infosys in getting greater competencies in the telecom vertical, Expert would also bring with it opportunities for the former to expand its wings in the Australian market (around 1% contribution to Infosys' 1HFY04 revenues). Notably, Infosys had recently won a five-year US$ 50 m deal from the Australian telecom major, Telstra, for providing the latter with software development and maintenance services. Now, this acquisition would also benefit Infosys in deepening its relationship with Telstra, as the latter is already a client of Expert.

While Expert provides software services in a number of verticals, its revenues are highly concentrated in the telecom segment. As seen from the graphs above, while the telecom vertical contributes to about 74% (US$ 25.6 m) to Expert's revenues, its contribution to Infosys' revenues is relatively small at 15% (US$ 114.3 m). As such, this acquisition offers the company (Infosys) a big potential to grow its revenues from the telecom vertical. Already, Infosys' telecom revenues have been under tremendous pressure in the past two years, very much in line with the slowdown in the global telecom industry. While other verticals (viz., manufacturing, BFSI and retail) showed strong or marginal growth in FY03, revenues from the telecom vertical witnessed a decline (see the graph below).

At the current price of Rs 5,356, Infosys is trading at a P/E multiple of 30x our FY04 earning estimates. Infosys is acquiring Expert at a price 4.4x latter's earnings (Infosys would pay US$ 22.9 m for Expert's June-ending 2003 earnings of US$ 5.2 m). This transaction would add almost Rs 3.5 to Infosys' FY04 EPS. While this acquisition comes a long time after Infosys issued its GDRs in the US markets with the view of using those funds for its inorganic initiatives, investors could take some respite that it has now happened. The company is sitting on a cash balance of over US$ 300 m and, we believe, in its bid to move up the value chain through developing competencies across verticals, Infosys could hunt for further acquisitions in the future.

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