Infosys plans deals to meet US$20b revenue goal

New Delhi

INFOSYS Ltd plans to step up acquisitions and venture capital investments as it tries to more than double sales to US$20 billion by 2020 amid a slowdown in the technology services industry.

The Bengaluru, India-based company is forecasting about US$1.5 billion of that projected revenue will come through acquisitions with the rest from organic growth, chief operating officer UB Pravin Rao said in an interview on Monday at the company's headquarters.

Infosys is searching for deals to expand its geographic reach in Japan, Latin America and Europe and to build its expertise in health care.

Infosys brought in Vishal Sikka as chief executive officer from German software maker SAP AG last August in a bid to revive the company's fortunes. It has been struggling with an industrywide slowdown in growth that has created challenges for companies.

"The industry growth rates are coming down and with the pace at which technology is changing, sometimes it takes longer for you to build capability internally," Mr Rao noted. "It becomes a lot easier and probably inevitable for you, if there are ways and means to acquire the capability much faster."

Since Mr Sikka's arrival, Infosys has made two acquisitions - in March it spent US$200 million on automation technology company Panaya Ltd and on April 24 it announced a US$120 million deal to buy San Francisco-based Kallidus Inc.

The company, which had completed just US$425 million of acquisitions over the five previous years according to data compiled by Bloomberg, has also created a US$500 million fund for investing in startups.

Shares of Infosys have climbed 18 per cent since Mr Sikka took the helm, outperforming the 6.2 per cent increase in the S&P BSE India Sensex.

"Many things we have done that probably we have not done as aggressively in the past," Mr Rao said. "It's a combination of things. A new strategy, new thinking, and also it's what's happening around us which is also making us do things in a more aggressive manner."

Some analysts including Diviya Nagarajan at UBS Group AG, who has a "sell" rating on the stock, see Mr Sikka's growth plans as being too ambitious. Achieving US$20 billion in sales by 2020 would entail a significant challenge, with Infosys needing to spend at least US$6 billion on acquisitions to meet the goal, the Economic Times reported on May 8, citing Ms Nagarajan.

Information technology services companies globally trade at an average 4.7 times sales, data compiled by Bloomberg show. Infosys had cash and near cash of US$5.2 billion as of March 31.

"We see it as a vision statement and not an indicator of growth prospects," Sandeep Muthangi and Nandish Dalal, analysts at IIFL Institutional Equities in Mumbai, wrote in an April 27 report titled "Still early for a leap of faith." The urgency to push for acquisitions is highlighted by a sharp deceleration in sales at Infosys.

Revenue increased 6.4 per cent to 533.2 billion rupees (S$11.1 billion) in the 12 months ended March, with growth slowing from an average 18.5 per cent in the preceding five years. India's second-largest software-services provider on April 24 forecast sales in the year started April 1 will rise by a maximum 8.2 per cent in US dollar terms, missing analysts' projections for growth of as much as 10 per cent. Infosys expects the new investments in startups to help strengthen its technology capabilities. The company, which has set aside US$250 million each for domestic entrepreneurs and for firms outside India, has so far backed two overseas startups.

"With the pace at which technology is changing it is practically impossible for a single company to provide all the technologies that a client is looking at," Mr Rao said.

"When we look at startups, many of them have interesting technologies" and over a period of time the firms Infosys invests in may become potential acquisition candidates, he added. BLOOMBERG