Lodestone acquisition by Infosys likely to be accretive in few quarters: Dipen Shah, Kotak Securities

By Dipen Shah

MUMBAI: The acquisition of a SAP consulting company has been on Infosys’ agenda for quite some time. The company has earlier tried to acquire Axon, another company, in a similar field. The acquisition is, thus, in line with the company’s strategy of furthering the depth in the consulting business. The acquisition will enable Infosys to increase the depth of its expertise and also help it in penetrating the existing clients more, apart from getting into new accounts.

Lodestone has consultants operating in the manufacturing, automotive and life-sciences verticals. These verticals have been the focus area for Infosys and are the ones which are currently seeing relatively stable demand, we understand.

Moreover, the acquisition is also expected to enhance Infosys’ presence in important markets like continental Europe, Latin America and Asia Pacific. However, we do not think it adds any new capabilities in any new vertical or service area.

Financially, the acquisition is at about 1.3x 2012 revenues (according to the management). Margins for on-site consulting companies are normally below 10 per cent. To that extent, the acquisition will likely become accretive in a few quarters.

We opine that this is a slight departure from Infosys’ earlier strategy on not looking at acquisitions which would dilute earnings in the short term. Also, the acquisition will address some of the concerns relating to utilisation of excess cash. It is not likely to make any significant difference to the overall financials as the revenues of Lodestone are less than 5 per cent of Infosys’ projected FY13 revenues.

(The author is Head of Fundamental Research, Kotak Securities)