Lodestone is a good strategic fit for Infosys: JM Financial

Infosys is planning to acquire Zurich-based global management consultancy firm Lodestone Holding AG at 330 m CHF (USD 350 million) in cash. The transaction is likely to close by October-end.

In an interview to CNBC-TV18, Govind Agarwal, JM Financial says this is a good strategic fit for Infosys. "I think it is a good transaction," he adds. Also read: Market cool to Infosys' Swiss co buy; deal size disappoints Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra. Q: What is your initial take with regards to Infosys acquiring Lodestone? Would you be concerned on margins at all? A: No. I think this is a good strategic fit for Infosys. They are doing well with the strategy of acquiring companies on the consulting space, on a product space. If you look at the company, it is mostly in Europe. Half the revenues are from Switzerland, one fourth from Germany. Verticals are mostly from life sciences, consumer goods, and automobiles. I would reckon that most of the clients would be in healthcare space, consumer space in Switzerland and some auto names in Germany. So, company would be getting a good client list from European markets. Europe is seeing a surge of outsourcing. We are seeing a lot more deal activity in Europe in terms of new outsourcers and new companies looking to outsource. It is a good market. In terms of strategy, it is on high consulting. In terms of structuring of the deal, they are paying only two thirds of the amount right now and one third of the amount will be paid after three years. It will ensure a smooth transition for the current management team. So, overall, I think it is a good transaction. On the margin side, I would not be too much worried because it is a too smaller transaction to impact the margins. In any case in high end consulting, the margins are on the lower side. It is more to acquire new clients. Once you do that, you can also have a lot of downstream revenues. Q: Would you worry, if you looked at as an EV/EBITDA terms, it looks expensive, more than 10 times? A: I will not be worried on the valuation too much. It is more to look at in terms of how it will be increasing the ability of the company, how it increases the footprint of the company. It is not about whether it is a good deal or not in terms of valuation. Q: In that case, are you changing any of your numbers for the current year for FY13 in terms of revenues? A: No. I think the company mentioned that it will be EPS accretive after 18 months. So, it will change revenues marginally, about one and half percent, one percent. But nothing on the EPS front. Margin dilution might be there, but with small basis points, about 10-20-30 basis points. I would be happier with the revenue synergy coming into the company. That will be more important to look at rather than margins. We can believe Infosys on the margin side. _PAGEBREAK_ Q: Are you changing your target price or your valuations in any sense? The market has been giving Infosys a discount to TCS because the conservative nature of the management. The fact that they have started off with one acquisition, do you want to reduce the gap that they now suffer with TCS? A: The transaction will not change the EPS estimate. As far as discount with TCS is concerned, discount is more because of lower growth outlook for Infosys versus TCS. This does not change any of those things materially. But it is definitely positive. Market should be comforted with the fact that Infosys is looking to acquire companies. They have been saying this for the last several quarters, but market was disappointed because there was no action or there was no acquisition. With the acquisition, investors should get comfort that they are using cash. The cash is used to acquire company at the higher end of consulting. They are not acquiring a BPO company or a low end company. So, on that front, it is good. As far as the target price is concerned, right now, it is Rs 2,500. We are not changing the target price. Q: What is your call on the stock? A: We current have a hold on the stock. We will retain this. Nothing will change on the financials. I don’t think we will change the numbers purely on the back of transaction. But it does increase the comfort among the investor community that the company is using cash in the right way. The concern on Infosys being more laid back or being more conservative, those apprehensions are also being addressed to some extent. Q: What would you like to hear from the management with regards to this acquisition or maybe even a broader strategy? A: I think management has already given details in the press release. They have already given a lot of details in terms of revenue mix, in terms of verticals, geography, deal structure, and EPS accretion. I would not be looking more into the details of the deal.