Infosys - Acquisition to support top-line performance - Reliance Securities

Infosys acquires Lodestone: Infosys acquired Lodestone Holding AG, a leading global management consultancy firm, for CHF330mn (US$349mn or ~Rs1,930cr) in cash. As a part of the deal, Infosys will pay 2/3rd of the consideration up-front, while, balance will be payable after 3 years subject to certain conditions. Lodestone advises international companies on strategy and process optimization, and provides business transformation solutions enabled by SAP. Lodestone reported revenue of CHF207mn (~US$211mn) in CY2011, an increase from CHF181mn in CY2010. Of this, 50% was from Switzerland and 23% from Germany.

- Key advantages for Infosys: Upon completion, the acquisition of Lodestone will strengthen Infosys' Consulting and Systems Integration (C&SI) capabilities, by bringing more than 750 experienced SAP consultants to the company and 200 clients. Other key advantages to Infosys are - (1) Acquisition will add momentum to Infosys' 3.0 journey with increased presence in business transformation consulting services, resulting in higher quality growth for Infosys; (2) It would increase Infosys' presence in C&SI space. Infosys will have over US$1bn revenues annually from SAP led offerings; (3) It will strengthen Infosys' footprint in Europe including near shore centers like Poland and Romania and (4) Very minimal client overlap.

- Impact: The acquisition will take Infosys' revenue from C&SI services to ~33%, which is in-line with the company's goal of achieving 1/3rd revenue from each of the three services areas. The acquisition will expand the company's revenues by ~1% for FY2013E and 2-3% for FY2014E, as the integration is likely to begin from October 2012. We will revisit our estimates once the company announces its 2QFY2013E results in October 2012. The acquisition comes in at a decent valuation of EV/Sales of ~1.6x (based on CY2011 revenues).

Outlook and Valuation

Infosys was aggressively looking for an acquisition over past 2-3 quarters as the organic growth took a hit amid tough demand conditions (on account of slowdown in US and Europe) and growing competition. Management has indicated that the acquisition would be EPS accretive only after 18 months. Hence, while the acquisition is sentimentally positive (sends a positive signal to the investors that the company is geared up for more acquisitions), we believe, owing to the size of the acquisition, the acquisition will have a marginal impact on Infosys' profitability. Considering that the acquisition is small, we would revise our estimates once the company announces its 2QFY2013E results. Hence, we maintain our Accumulate view on the stock with a target price of Rs2,630.

Risks to the rating

- The uncertainties plaguing the US and European economies can lead to volatility in earnings in the short term

- US$ has appreciated more than 10% over the last two quarters, which will have a marginal positive impact on the company in short term. However, any sharp depreciation in US$ in the long term will impact the company's margin

- Any delay in commencement of deals or cancellation due to slowdown in US can result in deviation from our estimates.

Source : Equity Bulls

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