Sell Infosys; target of Rs 2363: Nirmal Bang

Nirmal Bang is bearish on Infosys and has recommended sell rating on the stock with a target of Rs 2363 in its September 10, 2012 research report.

“Infosys has acquired Swiss-based consulting firm Lodestone Holding AG for CHF330mn (US$345mn) enterprise value (EV). Adjusting for debt, the implied equity value is CHF311mn (US$325mn) of which two-third is payable upfront (with the balance payable after three years). The transaction will close by end-October 2012. Lodestone earned FY11 revenue of CHF207mn (US$217mn) and has 850 employees on its rolls. The company provides Infosys with a roster of 200 clients and will boost its SAP consulting practice (over US$1bn post acquisition). The acquisition is in line with Infosys’ strategy of earning more revenue from high-end services even as the actual financial impact is small-we tweak our FY14E revenue and EPS estimates upwards by 3.4% and 0.9%, respectively. Acquisition valuation of 1.5x revenue appears reasonable in the wake of strategic benefits from the deal. However, we retain our Sell rating on Infosys and believe a re-rating is justified only on sustained improvement in revenue growth.”

“Infosys will pay a consideration of CHF330mn EV (US$345mn) for Lodestone. Adjusting for debt, the implied equity value is CHF311mn (US$325mn) of which two-third is payable upfront (CHF207mn or US$217mn), with the balance payable after three years. The transaction is expected to close by end-October 2012. Lodestone earned FY11 revenue of CHF207mn (US$217mn) and has 850 employees on its rolls.   The acquisition provides a boost to Infosys’ SAP consulting practice, which will top US$1bn in revenue post acquisition. It will raise the revenue share of consulting and systems integration (CSI) from 31% to around 33% and is in line with the strategy of earning a greater share of revenue from such higher-end services. Geographically, it will raise Infosys’ revenue share from Europe to nearly 25% (around 21% currently) as Lodestone earns 83% of its revenue from Europe (50% from Switzerland), while from a vertical perspective it will boost life sciences practice.”

“Taking CHF311mn (US$325mn) equity value, Infosys acquired Lodestone at a price to sales (P/S) multiple of 1.5x, which, in our view, is fair given the strategic benefits of the deal. The effective multiple is less than 1.5x as Lodestone could have a higher revenue base in three years’ time, given that one-third of the consideration is payable after three years. Infosys itself trades at a P/S multiple of 4.2x. We retain our Sell rating on Infosys and believe a re-rating is justified only on a sustained improvement in the revenue growth trajectory. We revise our TP to Rs2363 (Rs2,129) as we roll over to FY14 and raise our target PE multiple to 13x (12.5x) given positive signs of strategic intent shown in acquiring Lodestone,” says Nirmal Bang research report.”

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