Corporate: Infosys' Time To e-Xpand

CORPORATE: STRATEGY
Infosys' Time to e-xpand

The software major may have consistently outperformed, but it will now have to grow faster through acquisitions to justify the high P-E multiples.

By Dilip Maitra

The occasion matched the hype that went with it. On April 11, 2000, India's software sultan, Infosys, took its year-end results live on CNBC. A first-of-its-kind event, it was hard-sold by the channel. True to its style, the stockmarket darling did not disappoint the viewers who tuned in. It announced an 80 per cent growth in its turnover to Rs 921.46 crore, and a whopping 115 per cent jump in the bottomline. A euphoric market sent the scrip (code: Infy) soaring-but just for that day. With nasdaq losing ground, and Dalal Street sobering down, Infy plummeted over the next five days, wiping out a quarter of its market cap. Once again, the wayward market had defied logic. It had proved that in a herd market, colours of sentiment were much more potent than the black and white of financial numbers. That, however, doesn't faze Infy's charismatic CEO, N.R. Narayanamurthy, though. And for good reason.

Infosys has regularly outperformed analysts' expectations as well as its competitors in the last two years. For instance, in 1999-2000, Infosys' net margins stood at 31 per cent compared to Satyam Computers' 20 per cent in the same year, and NIIT's 10 per cent in the first six months (ended March 31, 2000), of the current year. More startling is the growth clocked by other ratios: Return On Capital Employed was up from 86.3 per cent in 1998-99, to 111.68 per cent the next year, and Earnings Per Share from Rs 40 to Rs 89 during the same period.

Agrees Vivek Reddy, 37, Chief Executive, Kothari Pioneer Asset Management Company: ''Infy does better because it has focused on increasing (gross) revenues, margins, and revenues per employee.'' As a first step, the company has moved from low-end to high-end jobs. Says Nandan Nilekani, 45, Managing Director, Infosys: ''Each month, we are going up the value chain. We are undertaking jobs that are sophisticated, challenging, and mission-critical. These (jobs) pay us more.'' That's reflected in the 20 per cent hike in revenue per employee last year.

Spotting New Opportunities

In fact, after its listing on the NASDAQ in March, 1999, Infosys' image has grown in the US market, which accounts for three-fourths of its revenues. That has helped the company to dictate terms to its clients. The result: while three years ago, 80 per cent of Infosys' revenue came from the low-margin time-and-material contracts, where the company quotes a price based on its costs, the figure has gone down to 65 per cent in 1999-2000. Agreed a Research Report (May, 1999) prepared by DSP Merrill Lynch: ''Infosys is now aggressively marketing its capabilities versus the earlier years when it could win business merely owing to its cost advantage.''

The aggression is also helping Nilekani to spot new opportunities, even as the old ones vanish. For instance, the loss of y2k-related jobs, which accounted for a fifth of the company's revenue in 1998-99, came from Net and e-Commerce enabling businesses. The latter's contribution to sales grew from just over 1 per cent in the first quarter of 1998-99 to nearly 18 per cent in the final quarter of 1999-2000. ''This is one of the fastest-growing segments, and will be the engine of our growth for the next five to six years,'' notes Nilekani.

True. For, out of the 99 clients that Infosys added in the last financial year, 25 were in the area of e-Commerce and Web technologies. That explains why investment analysts like Motilal Oswal, in its report in July, 1999, said: ''e-Commerce now looks set to take on the mantle of the new growth driver for Infosys.'' Of course, this strategy is not unique to Infosys. For example, NIIT entered this segment before, and, in the six months ended March, 2000, 35 per cent of its revenue of Rs 197 crore came from the e-Commerce business. Others like Satyam Computers and Wipro are making moves to expand in that segment.

Apart from new segments, Infosys is exploring new markets. While the US would continue to be its biggest market, the company is expanding into the European market. Last year, Europe accounted for 16 per cent of its revenues, up from 9 per cent in 1997-98. In contrast, the US share has dropped from 82 to 77 per cent in the same period. Infosys has also signed a Ł28-million contract with Sainsbury's Supermarkets, one of the largest supermarket chains in the UK.

Scouting For Acquisitions

It is obvious that if Infosys has to justify its high Price-Earnings multiples of between 227 and 154, it has to expand furiously. While organic growth may help, it is time now for the company to seek acquisitions. Not surprisingly, it is toying with the idea of acquiring technology companies in the US. The company will not reveal its targets, but Nilekani says: ''(The acquisitions) will be complementary to our existing skills.'' Translated, it means e-Commerce firms that will add to Infosys' presence in that segment.

Money should not be a problem for Infosys. For one, it has an in-principle approval from the Union Ministry of Finance to invest up to $2 billion in acquisitions abroad. In addition, it is a debt-free company with reserves of Rs 800 crore and free cash of Rs 423 crore. Points out T.V. Mohandas Pai, 39, Senior Vice-President and Head (Finance), Infosys: ''The liquidity gives us the flexibility to make quick investments in line with the changing environment.'' But there's no saying if this will curry favour with the bulls that be.

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