Sep 08, 2012, 12.30 PM IST | Source: CNBC-TV18

Scouting for acquisitions in product, platform biz: Infosys

SD Shibulal, the current Chief Executive Officer and Managing Director of Infosys, is one of the seven engineers who launched the company in 1981 by pooling in USD 250 million to make what is today one of India's largest IT giants.

SD Shibulal, the current Chief Executive Officer and Managing Director of Infosys , is one of the seven engineers who launched the company in 1981 by pooling in USD 250 million to make what is today one of India's largest IT giants.

As the global business environment continues to be challenging, Shibulal said that there are delays in clients' decision making process. "Larger opportunities are going through multiple levels of scrutiny and we are continuing to see it. In my mind, there have been positive and negative reports but I am not seeing a material change in the environment in which we operate," he said.

Given the competition and the tough environment, many IT companies have been slashing prices to win deals. However, Shibulal maintains that their focus is on delivering value. "One needs to look at pricing as a portfolio. Looking at pricing on a deal-by-deal basis is not possible. One should remember that lowering prices probably is one of the easier things to do. But I clearly believe that the more important thing for us is to deliver value and that is what we are focused on. We want to make sure that we are delivering superior value to our clients."

Furthermore, Shibulal informed that the IT major is scouting for acquisitions to expand its product and platform businesses. “It is a very important part of the strategy because in the olden days, one used to talk about consulting acquisitions; the importance of that has come down because we have built our consulting and system integration capability. An acquisition in continental Europe will make sense. There are areas which are very relevant to acquisition. We are talking about taking 6.5% revenue that is what we get from products and platform from today to a much larger base. So acquisition makes perfect sense. There are various areas which we have identified and strategic to us, and we are very focused on looking at acquisitions."

Below is an edited transcript of the exclusive interview.

Q: It has been a fairly rocky ride over the last 2-3 years. Ever since you took over, you have been busy; the market has been volatile, clients have been cutting down expense. How have it been since you took over till date?

A: As I see, your actions are driven by 2-3 things. One is the strategy which you are pursuing as a corporation, so Infosys is definitely on a new strategic path. Last year, we launched Building Tomorrows Enterprise, a new strategic path and direction. It is a framework for innovation and co-creation. We are seeing excellent traction. The recent industry reports are endorsing our strategic direction. As a CEO, your actions are driven by the strategic direction you are taking.

Two, it is driven by the environment, which has been challenging. There has been volatility in the environment and there has been volatility in the US and Europe, and that of course, drives some of my action and my style. These are the other factors which go into your actions.

Q: In the last two quarters, you had certain amount of revenue decline. Does that worry you or is this a one off considering the market is volatile at this point?

A: If you look at the last quarter, our guidance was USD 1771-1789 million; our revenue was USD 1752 million. There are two factors one needs to consider. One, we lost USD 13 million because of inter-currency movements and that is not in our control. We took a one-time charge. If I normalise both of those, I will end up somewhere around USD 1780 million, which is right in the middle of the guidance, approximately 0.4% growth if I had done that.

Irrespective of this, one also needs to look at the volume growth. Last quarter, we grew by 2.7% in volumes.

Q: Are those challenges still present in the next quarter? Are clients still either backing down on IT spends or cutting down contracts?

A: In the beginning of this quarter when we actually gave guidance of at least 5% for the year, we had said that the environment is volatile; there are delays in decision making. Larger opportunities are going through multiple levels of scrutiny and we are continuing to see it. In my mind, there have been positive and negative reports but I am not seeing a material change in the environment in which we operate.

Q: Are you on track with the 5% guidance at least for now?

A: Our guidance is based on a statement of fact as we see it. In the beginning of the year, we have visibility for 65% of the business, we have to make up 35% of the business during the year. For a quarter it is 95%, but 5% of USD 1.8 billion is USD 90 million, which has to be made up in approximately 50 working days. At this point in time, there is no material change, which will lead us to revisit the guidance.

Q: You have around 86% exposure from the recession-hit markets of US and Europe, are you now gradually reducing this dependence and increasing focus on emerging markets?

A: Definitely, we are expanding our presence in other markets but one should also keep in mind that US, by far, is the largest spender of technology and you have to be part of that market. When you look at Europe, it is true that Europe is going through certain challenges but when we look at our revenue profile; 10% of our revenues come from continental Europe, which means continental Europe can grow for us. This means it is actually our emerging market. So we are investing in Germany and France. We have five countries in continental Europe where we are focused on - Germany, France, Switzerland, Belgium and one more. We see these five countries as growth potentials. Even this year, we expect that Germany and France will grow above our average.

Having said that we are also growing in the other parts of the world; we just announced the India Post deal in India. We have taken a different approach in India; we have taken an approach of a pure system integrated approach where we are rebuilding the platform. We are delivering intellectual property to our clients and that is also doing very well.

Q: This is has been an eternal investment complaint that Infosys has been conservative in tapping into its USD 4 billion cash pile. When are you looking at a big acquisition?

A: Firstly, we are actively looking at it. Second, it is a very important part of the strategy because in the olden days, one used to talk about consulting acquisitions; the importance of that has come down because we have built our consulting and system integration capability. An acquisition in continental Europe will make sense. There are areas which are very relevant to acquisition. We are talking about taking 6.5% revenue that is what we get from products and platform from today to a much larger base. So acquisition makes perfect sense.

Our addressable space for acquisition has enlarged considerably when we launched this new strategic direction. We are looking for acquisition in public service because that is another area that we have opened up. We have set up a subsidiary in US called Infosys Public Service, so it makes sense to acquire something there. There are various areas which we have identified and strategic to us, and we are very focused on looking at acquisitions.

Q: How much would you spend if there has always been the trajectory of anywhere more than USD 250 million? How much are you looking at spending from the deal that you are talking to right now?

A: The way I would say, it is slightly different. I would say we are comfortable because we are a USD 7 billion corporation and we are comfortable acquiring upto 10% of our revenue. Valuation depends on various things, it depends upon the type of acquisition, the type of deal you are closing. But when I look at acquisition, I look at how much we can easily integrate. I am very confident that we can integrate upto 10% of our revenue.

Infosys stock price

On April 17, 2014, Infosys closed at Rs 3180.15, up Rs 23.75, or 0.75 percent. The 52-week high of the share was Rs 3847.20 and the 52-week low was Rs 2190.00.


The company's trailing 12-month (TTM) EPS was at Rs 177.52 per share as per the quarter ended March 2014. The stock's price-to-earnings (P/E) ratio was 17.91. The latest book value of the company is Rs 805.47 per share. At current value, the price-to-book value of the company is 3.95.

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