Infy’s falling shares attractive for PE play?

Low Promoter Stake, Poor Valuation Make IT Co Candidate For Outside Intervention Mumbai/Bangalore: Infosys shares have fallen cheaper than that of iGate Corp and Tech Mahindra on valuation metrics, making India's second largest technology services company attractive to new shareholders who would look to "influence" the management.      Top bankers have explored whether large investors — private equity groups or hedge funds — could be goaded into building up a significant stake in Infosys after the stock was hammered following a string of under performing quarters. Infosys, with a traditionally low promoter holding, is in the toughest phase of its life since going public almost two decades ago.      "Large funds are comfortable with the long-term growth of Indian IT services. They like mature, growing businesses where they could be influencers. Infosys is already attractive at current valuations for investors wanting to buy-in. But are there large blocks of shares available? It's also not certain what level of influence they would wield even after building a large stake," said Nikhil Rajpal, Partner, Ernst & Young.      Bankers averred that Infosys won't be a classic acquisition target, with founders who hold about 16% not being the sellers. "Long-term investors may want to influence a change of direction in a company that's grappling with transformation in difficult times," said a banker who did not wish to be named. Big investors influencing the boards of underperforming companies isn't new globally, with one such playing out at consumer goods giant Proctor & Gamble (P&G).      "Infosys is a world-class business with high standards of corporate governance, and private equity firms would naturally be drawn to it. But it won't be a simplistic decision based on current P/E multiples relative to historic (values). In my opinion, it would be depend on a set of factors such as the evolving structure of IT services industry and preferred client engagement models, global economic revival and other triggers, which could erode profit margins and operating leverage going forward," said Rahul Bhasin, Managing Partner, Baring Private Equity Partners India with more than $1 billion in assets.      Infosys promoters have consistently said that they are not worried about their low stake in the company and have termed it a deliberate strategy. From 100% just before the company went public in 1993 their stake has fallen to the current level because the promoters, as a matter of principle, did not subscribe to any rights issues, preferential allotments or ESOPs. Today, 13% of the shares are with retail investors while institutional investors hold a 56% stake, with the biggest chunk being held by foreign institutional investors (38%).      Infosys's valuations based on price earnings (P/ E) ratio and EBITDA multiples dropped sharply in recent quarters. It's not only behind peers Tata Consultancy Services (TCS), Wipro and Cognizant Technology Services, but even smaller rivals such as iGate. HCL Technologies and Tech Mahindra, too, had higher EBITDA multiples compared to Infosys, according to a fortnightly report of Chesapeake, a New York-based technology investment bank, based on June 30 stock quotes. Infosys's mcap was then pegged at $25.7 billion, days before the latest quarterly numbers routed the stock further.      Infosys's P/E ratio at 15x trailed that of Wipro (17.5), iGate (22.5), Cognizant (19.8) and TCS (24). On EBITDA multiples, Infosys fared worse at 9.8x, falling behind most IT services companies (except Mphasis) with revenue in excess of $500 million. Analysts combing P/E ratios on forward earnings, which some argue are more relevant, also suggest the falling lustre of the technology services bellwether.      "The valuation multiples of Infosys are now closer to the mid-caps. The company's P/E ratio at 13x (based on FY13) is comparable to HCL Technologies, which used to trade at significant discount historically. There have been worries over growth and earnings stability. Infosys has talked about a transformational story, ramping up revenue from products platform and consulting over the next 5-7 years. We do not see an immediate re-rating of the stock, but possibly over the next 18 to 24 months," said Priya Sunder, research analyst at Avendus Securities, who put a 'add' on the stock citing valuation comfort.      Bankers have always had an eye on Infosys, given its historical low promoter holding. Even 10 years ago, it was below 30%. Buzz in Bangalore is that it was once hawked to Azim Premji, who then held a 80% plus stake in Wipro. A block deal and a share swap would have given him Infosys while retaining majority control over Wipro. Premji is said to have summarily dismissed the proposal. More recently, a big European bank approached Infosys to explore a consolidation story, which, again, was rejected in the first sitting.      Earlier proposals stayed at that level mainly on two accounts: Infosys's vaunted management and valuation. The argument against buying Infosys being that value in the company rests with its management and an acquisition would see them head to the exit and an Infosys without Murthy & Co would be just another company. But the company's current management lacks the lustre of Murthy and Nilekani reign.      Second deterrent was its until recent very high valuation, with P/E comfortably in the higher 20s. That made Infosys a very expensive acquisition. The price was a put off earlier but no longer, maybe. Financial investors would find $4 billion cash sitting on the company books a tough to factor in, said one banker, who added that the cash pile might be a deterrent inadvertently.      "It's still not a terribly cheap buy for anyone unless they have a meaningful influence on the management," said one of the bankers mentioned earlier. Private equity firm ChrysCapital made a small play (building up under 2% stake) in Infosys in the past, purely as a stock market investment. It exited with handsome returns almost two years back before the company entered the bearish phase. Interestingly, investors haven't been vocal in airing angst against the management despite the company's under-performance in recent quarters. "There aren't large shareholders wanting to press exit yet. Some of them believe in the transformation story with Shibulal doing a good job in keeping the management intact till now," said a research head at a foreign brokerage who isn't authorized to talk to the media.

Infosys Underachieves Again, Quits Europe Buy Last Minute

AXON REDUX: THIS TIME, A BELGIAN FIRM

Infosys came tantalisingly close to a European acquisition last month but developed cold feet at the last minute, much like in 2008 when it walked away from Axon, a company that was eventually bought by rival HCL Technologies. 

In June, after several rounds of negotiations and due diligence, Infosys was just days away from announcing the acquisition of Belgian payment solutions firm Clear2Pay for around half-a-billion dollars (. 2,700 crore), a person familiar with the matter told ET. 
A possible dispute over valuation arose at the last minute, making Infosys baulk and abandon the deal despite its belief that the privately-held company was a snug fit because of its intellectual property, product suite, client roster and management, the person said. 
Infosys and Clear2Pay declined to comment. 
India's second-largest software exporter has been underperforming vis-à-vis its rivals and has been under pressure to use its nearly $4-billion cash hoard to make a significant acquisition. Many analysts are of the view that Infosys is extremely risk-averse and unwilling to take bold decisions that will alter the status quo substantially. 
In 2008, Infosys was on the verge of acquiring UK-based enterprise software consulting specialist Axon for £407 million, but a week after it made its intent public, HCL made a counter-bid at £441million to win over Axon's board. Infosys refused to get into a bidding war and was criticised by many for its unwillingness to risk a contest with HCL despite being in a vastly superior financial position. Infosys is said to be evaluating several acquisition targets in the US and Europe as part of a broader transformation strategy in a fast-changing IT services sector. An acquisition by Infosys has become a litmus test of its ability to be bold and not be chained to its extreme conservatism, which some analysts say is affecting its performance and threatens its bellwether status in the industry. Infy Stock Worst Performer among IT Cos 
The Infosys stock is the worst performer among the toptier IT services firms this year, having fallen sharply on two occasions after the previous quarterly results. 
A media report last week said Infosys was in talks with Switzerland-based consulting firm Lodestone Management Consultants for a possible acquisition worth more than $300 million. Infosys declined to comment even then. The company has in the past talked about its intent to acquire companies that are worth roughly 10% of its annual revenues, or about $700 million. Since inception in 1981, it has made just four acquisitions, the largest being the 2009 purchase by its BPO unit of US-based insurance solutions provider McCamish Systems for about $58 million. 
The negotiations with Clear2Pay, a maker of software for banks, credit card companies and large corporations, were led by Chief Financial Officer V Balakrishnan. Chief Executive SD Shibulal also travelled to Belgium as part of the negotiations. The signing of the agreement and the announcement were to have taken place in the final week of June.

Infosys Q3 net up 33%, gives guidance shock

Sits On 20K Cr Cash, Seeks Growth Without Compromising Margins | Stock Tanks 8%

TIMES NEWS NETWORK 

Bangalore: IT major Infosys posted a revenue of Rs 9,298 crore —up 31% over the previous year and 15% over the previous quarter —for the third quarter of this fiscal. Net profit at Rs 2,372 crore was 33% higher over the previous year and 24% over the previous quarter. The results were better than the company's revenue guidance of Rs 8,826-9,012 crore for the third quarter. 
    However, the strong rupee revenue numbers were a result of the depreciating rupee, which fell 11% in the October-December quarter. In dollar terms, the company posted revenues worth $1,806 million, a growth of 14% over the previous year and 3.4% over the previous quarter. The big negative which weighed over the good Q3 numbers was the company giving zero to marginal revenue growth guidance for Q4, at between $1,806 million and $1,810 million. 
    This disappointed the street as IT stocks were the worst losers with the BSE IT index falling 5.96%. Topping the losers was Infosys, which was down 8.4% at Rs 2,588.60, followed by TCS down 3.89 % at Rs.1,092.90 and Wipro down 2.6 % at Rs.391. 
    On the operating margin front, the company outperformed this quarter with EBIT margin growing by three percentage points sequentially (from Q2 to Q3) to 31.7%. According to CFO V Balakrishnan, the company also saw a marginal improvement in pricing due to a shift towards high-value services. The company said, as of Dec 31, 2011, its cash and cash-equivalents stood at Rs 19,752 crore. Most analysts agree that Infosys is being very conservative with its money. While global technology firms like IBM and Dell have time and again used the inorganic route to grow rapidly, Infosys has not sufficiently used its Rs 20,000 crore worth of cash reserves for large M&As. 
    Though it recently acquired Australian BPO firm Portland Group for close to Rs 200 crore, analysts feel that larger and more strategic buys are vital for the company to accelerate growth.

Infy Back at IT with 9.7% Net Profit Rise

A WEAK RUPEE HELPS CO BEAT ESTIMATES; STOCK REBOUNDS

Infosys' second-quarter results and its forecast for the rest of the year beat expectations, leading the stock markets to conclude that India's second-largest software exporter and the IT services sector have regained the spring in their step. Helped by a strong dollar, the Bangalore-based company reported a 9.7% increase in profit for the three months to September and marginally lowered its guidance for the financial year ending March 2012. 
Even so, its shares and those of other technology service providers such as TCS, Wipro and HCL seemed energised — the first time in many quarters that the announcement of Infosys' results has evoked such a reaction. Investors pushed Infosys shares up 7% on BSE on Wednesday to close at . 2,679.35 — the biggest climb since May 2009. 
The results could be perceived as a vote of confidence in the new management of Infosys, which is just about settling down after a leadership transition that saw the exits of founder NR Narayana Murthy and K Dinesh, as well as its high-profile human resources head T Mohandas Pai. 
SD Shibulal, the new chief executive, was measured in his assessment of the market environment. 
"We need to remain cautious. We are seeing that clients are becoming cautious about investments. There are delays in decision-making. At the same time, we are not seeing project cancellations," he said. 
Infosys' earnings helped the benchmark BSE Sensex advance 2.6% while shares in rival TCS and Wipro closed up 3.66% and 2.71%, respectively, reflecting the overall buoyant mood in India's $76-billion IT sector. Infy's Sales Machine Going Full Throttle 
The software major's sales machine seems to be operating at full throttle, winning 45 new clients during the quarter, the best performance in a year and a half. Costs, too, have been kept on a tight leash, rising just 3.6% sequentially while revenue growth was 8.2%. 
Another reason the rest of the year looks good for Infosys is the spending pattern of clients has changed. While earlier, spending would be front-loaded, this time it is more evenly spread, meaning the traditionally weak latter half of the year will now be stronger. 
"This year is an abnormal year. In a normal year, you always see growth being front-loaded. The growth (this year) is going to be evenly spread out because it is an abnormal year," CFO V Balakrishnan said. 
Infosys' net profit for July to September rose 9.7% to Rs 1,906 crore. Revenues for the second quarter grew 16.6% to Rs 8,099 crore. 
As projected by most brokerage firms, Infosys also lowered its revenue forecast for the year ending March 2012 by around 1%. Infosys' second-quarter earnings marked its return to nearly double-digit growth after three quarters of disappointing numbers, but macroeconomic worries in the US and the European debt crisis forced the company to lower its revenue forecast for 2012 from 18-20% projected earlier to 17.1-19.1%. "If the world goes through a slower growth phase, then it is ok for us. Clients will focus more and more on operating efficiencies, how to increase revenue etc. Those are sweet spots for us. If the world goes into a double dip like in 2008, then you have a problem. Pricing and volume growth could get affected," Balakrishnan said. 
Infosys, which has lost a quarter of its market value this year (now at $27 billion), has been lagging rivals TCS and Cognizant in both revenue and profit growth over the past 3-4 quarters. 
Long used to being the bellwether for the IT services sector, Infosys' status as the most preferred technology stock has been challenged in recent months. Market leader TCS hasbeen growing its revenues and margins at a faster pace while Cognizant has been clocking growth rates that Infosys saw in its heyday. 
Balakrishnan, therefore, was obviously pleased by the stock market's reaction to his company's results. 
"Maybe the markets think we performed like Sachin Tendulkar. This is what matters," he said, with reference to his comment last quarter on how the market had come to expect Infosys to perform like the ace batsman every quarter.
But others, such as Nimish Joshi of brokerage house CLSA, were less upbeat. 
"Most of the positive reaction is in contrast with much deeper negative sentiments already built in the Infosys stock over past few quarters - it can only move up from here," said an analyst with a multinational brokerage house based in Mumbai. During the first quarter ended March this year, investors dragged Infosys shares down 4.3% after the company said its net profit for April to June fell sequentially over 5%. 
"Upward revision of EPS guidance to Rs 143-145 (driven by a benign currency assumption) will excite a section of the street. However, we see these revisions as late re-alignments versus the rally seen across tech stocks in the last three weeks," Joshi and his colleague Arati Mishra wrote. 
With nearly $4 billion in cash, Infosys is also under pressure to make an acquisition and put its cash to use. 
"We cannot confirm rumours. We are dating but not yet engaged. We have expanded our addressable space, we are looking at products and platforms, country penetration and domain skills. Nothing to report yet," said Shibulal.

India:High Wages, Expiry of Tax Breaks will Hit Mid-Cap IT

FIRST QUARTER PREVIEW Rising IT Demand Will See Revenue Growth of Up to 5%, But... JAYADEVAN PK BANGALORE      Mid-sized technology services firms will see revenues growing anywhere between 2% and 5% for the first quarter ending June on the back of growing demand for IT services. However, expiry of tax breaks under the software technology park scheme and rising wages will be party-poopers pulling down net profits and margins for these second-tier IT companies.  Companies like Hexaware Technologies and KPIT Cummins are expected to post strong revenue growth of between 3% and 7.5% for the quarter. For Hexaware, which is expected to meet the upper end of the dollar revenue guidance, brokerage firm CLSA says margins will be moderate due to wage hikes over the past few quarters. Bangalore-based MindTree is expected to maintain confidence in business prospects throughout FY12 and likely to rebound after disappointing results in the past quarter.  While revenue momentum is being driven by higher demand across banking, financial services and insurance (BFSI), retail and manufacturing, the expiry of tax benefits claimed by IT firms under the software technology park scheme will definitely hit bottomlines. The benefit was discontinued from March this year. Margins are expected to drop by 200-360 basis point for the mid-cap tech firms, says brokerage MSFL.  Wage hike is another factor eating into net earnings. "Margin pressures are likely to be subdued by wage hikes," said the CLSA report. Most companies spend on wage hikes during the first quarter of the fiscal. Chennai-headquartered Polaris Software, a report by brokerage firm Sharekhan points out, is expected to report a 5.5% quarter-on-quarter revenue growth in dollar terms to $102 million. However, its margins may decline by 90 basis points over the previous quarter to 11.1 % due to wage hikes during the quarter. Over previous quarter's levels, net profit is expected to decline by a significant 23% to Rs 44.3 crore given the higher tax rate. Polaris will have to pay an effective tax rate of 27% this quarter against a nuch lower 13.4% in the previous quarter.  NIIT Technologies is also likely to report a robust 4.4% sequential revenue growth. Here too, margins are expected to decline by 270 basis points over the previous quarter to 17.8 % on account of wage hikes. Net profit will also drop due to higher tax rates "In the mid-cap space, KPIT Cummins will deliver the strongest growth at 4 % quarter on quarter. Geometric's growth will be flat on back of delay in some projects," the MSFL report said. Summing it up, Rohit Kumar Anand of Pinc Research points out: "Mid-tier firms will deliver bi-polar results with firms being clear outperformers and laggards in terms of revenue growth. Players like Hexaware and Persistent are likely to show strong revenue growth this quarter. Others like MindTree, MphasiS, Sasken and Geometric are struggling with specific issues which will result in muted revenue growth."  Goldman Sachs equity research says the demand environment will be stable as indicated by the better-thanexpected results of Accenture and Oracle. The Goldman Sachs IT spending survey showed that budgets for discretionary IT projects that require services from system integrators, application developers and other IT consulting compoanies remain strong with an upward bias. Wage hikes, pressure from stronger rupee, gains from favourable cross currency movements, pricing movement and extent of volume growth will be the key factors that will contribute to margins.  "Among mid caps IT firms, we expect sharp margin decline for Mindtree and Mphasis while Hexaware could surprise on the upside," said a report from Kotak. Worldwide IT spending is on pace to grow 7.1% in 2011, according to the latest quarterly spending outlook by technology consultancy Gartner. Analysts have revised overall IT forecast spending growth in US dollar terms, up from their first quarter update, when they projected 5.6% growth for 2011.

India IT Biggies to Post Top-Dollar Sales

Top 4 cos expected to report sequential growth of 4-6% in dollar-denominated revenues

SHRUTI SHARMA & RANJIT SHINDE BANGALORE |MUMBAI

The top four listed IT companies are expected to report sequential growth of 4-6% in dollar-denominated revenues during the quarter ended June 30, 2011, better than the lukewarm growth of 2-4% in the previous quarter, as demand stays strong in the key markets of Europe and North America. The profitability of some companies, including TCS and Infosys, the two largest IT players, could face marginal pressure due to wage hikes, but overall profitability of the sample group of companies is expected to remain intact with some marginal improvement expected from Wipro, as per estimates by ET Intelligence Group. TCS, India's largest software company, and Shiv Nadar-controlled HCL Technologies, the fifth largest, are likely to be the biggest beneficiaries of the IT outsourcing demand. According to ETIG estimates, investors can expect a 5-7% sequential topline growth from these companies during the June quarter. Infosys and Wipro, the secondand third-largest IT companies, are likely to experience higher revenue growth than the previous quarter, but may continue to lag behind their peers. Infosys, which will kick off the first-quarter results season when it declares its numbers on July 12, is expected to beat the upper end of its guidance. The company has guided for sequential revenue growth between 2.6% and 3.6% in dollar terms. But the average of the estimates of seven brokerages is higher. They predict a 4-5% revenue growth in the June quarter. Wipro may Beat Guidance The company is expected to raise its full-year dollar-denominated revenue guidance from 18-20% by 50 basis points. TCS is expected to reap the benefits of strong demand, especially in the BFSI segment, with around 6-7% sequential growth while HCL Technologies is likely to clock a similar growth backed by benefit from strong infrastructure spending to see a quarter-on-quarter revenue growth of 6-7% in dollar terms. Wipro is expected to beat the upper end of its guidance with a sequential revenue growth of 2-2.5% in dollar terms. Investors would also be keen to gauge the future demand scenario in the backdrop of the uncertainty hanging over the world economy in the wake of the Greece debt crisis, and an apparent weakening of US growth. In a report that was widely reported, brokerage firm CLSA spoke of a deceleration in new contracts. The report, which was issued last month, expressed concerns over the growth momentum of top IT players after taking into account the delay in economic recovery in the US and Europe, the major markets for Indian IT companies. These markets contribute over three-fourths of India's IT exports. Other industry analysts reckon that demand is likely to remain firm despite the macroeconomic woes of the West. Last week, research firm Gartner said it expects global spendon IT services to grow by 6.6% in 2011, more than twice as fast as in 2010. The firm had earlier predicted 5.6% growth for 2011. The views on future demand among sector players are mixed, though. Infosys CEO and MD S Gopalakrishnan was cautious while speaking to ET early last month on discouraging economic data from the West, "The business environment remains volatile with decisions being delayed or postponed frequently. This may impact the IT services business broadly, or by industry, or by customer," he had said. But is appears to be business as usual for Wipro. "We haven't heard any concerns during our discussions with customers so far. We also expect sustained demand for our services and continued growth momentum in the coming few quarters," CEO TK Kurien had told ET before the company's silent period. TCS also reiterated its stance of sustained client funding and smooth project ramp-ups in an investor communiqué in June. Attrition is likely to remain high for most companies as most of the movement happens during this quarter and employees also leave for further studies. The top four players are trading at P/Es of 18-25 of their FY12 estimated earnings. This fully takes into account the expectations of sustained demand recovery in the quarters to come. Therefore, the valuations of top players are likely to remain range-bound until a major trigger in terms of escalated volume growth coupled with higher billing rates.

Nifty Cos Set for Robust Q1 Show

ETIG analysis reveals companies in most-tracked index to record 19% profit jump, 26% rise in sales 

Tech majors, banks & Bajaj Auto to lead earnings growth while oilcos may be worst hit

 Bajaj Auto, Axis Bank and miner Sesa Goa will lead the S&P CNX Nifty companies' June quarter earnings rise by a fifth and a 26% surge in sales, validating Reserve Bank of India governor Duvvuri Subbarao's belief that the economy is still humming. 

Profits of companies in the most-tracked index may rise, but their profitability is poised to shrink due to higher raw material prices, wages, and increased funding costs, an analysis by ET Intelligence Group shows. 
Technology companies led by Tata Consultancy Services and HCL Technologies, which are enjoying abundant order flows from the US and Europe, would contribute to growth numbers. Domestic demand will drive earnings at Bajaj Auto and lender HDFC Bank. 
Among the worst hit may be state-run oil companies as they partly subsidise petroleum products consumption, including cooking gas. A fall in cement prices due to slackening construction and price competition in telecom services may result in these companies reporting a fall in profits. 
"Despite the initial perception of a production slowdown, the revised Index of Industrial Production series shows investment and industrial activity held up well throughout FY11," Anubhuti Sahay at Standard Chartered Bank said in a report. "A recent salary survey conducted by a private firm showed that Indian corporates are still willing to hire and have increased salaries in order to retain workers. While the impact of higher interest rates is apparent in some sectors—auto sales growth slowed to 18% in May from an average of 32% in the previous 20 months—it is not yet broad-based." 
The aggregate net profit of Nifty 50 companies may grow 19% year on year, the ETIG analysis shows. Net sales may advance 26% in the June quarter from a year earlier. This will be the seventh consecutive quarter of aggregate double-digit growth since September 2009 for India's 50 large and frequently traded companies. 
But soaring costs, in the form of higher interest rates and expensive inputs, could reduce the operating profit growth to 21.4% from a year ago. Pressure on Profitability 
This will be the slowest pace of operating profit growth since the September 2009 quarter when profit rose just over 4%, as demand fell post-Lehman bust. Operating margin is likely to shrink by 80 basis points from the year ago, and 170 basis points sequentially to 21.8%. A basis point is 0.01 percentage point. Pressure on profitability may sustain as there are no signs of easing of interest costs and the fall in commodity prices appears more temporary than permanent. With inflation forecast to rise after the recent raise in diesel prices, chances of interest rates falling are slim. 
"We raise our WPI inflation forecast for FY12 to 8.6% from 8.1% as a result of the government's move (to increase prices of petroleum products)," says the latest report by Goldman Sachs Group. 
Higher inflationary expectations are a double whammy for economic growth. The companies would not only spend more on inputs, but also postpone investments. 
The central bank has raised interest rates 10 times in the last 15 months. Policy rates have increased by 225 basis points in the last 12 months alone. 
The Nifty at current levels trades at around 17 times its earnings in the four quarters to June 2011. Though it may not be expensive compared with its range of 17-23 in the last 10 quarters, investors are cautious. Earnings growth may fall further. 
Some expect another 50 basis points rise in the RBI's guideline rate, which is 7.5% which could squeeze investments further. 
"With the RBI prioritising inflation over growth, we expect a 25-50 basis point hike during the course of 2011. But with the underline consumption dynamics, the need of the hour is a pickup in the investment cycle and productivity enhancements," explores Citi Investment Research and Analysis in its latest report on India's macroeconomic trends.
Public sector oil and gas companies will see a repeat of high under-recovery problems seen in the March 2011 quarter. This will translate to subdued quarterly profit figures for ONGC and Gail. BPCL is likely to post a small profit compared with its huge net loss last June, provided the government's aid arrives in time. The slack in order inflows in the engineering space, especially in the power transmission and distribution segment, is likely to impact margins of some capital goods players. Companies such as Bhel and L&T will report slower profit growth during the June quarter.