What Can Infosys Do With Its USD 4 Billion Cash Reserves?

Over the past few quarters, the IT sector has been witnessing a slower than anticipated demand caused by global uncertainty, delays in spending by clients and vigorous cross-currency fluctuations. Among the big players in the sector, Infosys has been curbed to a larger extent than the others because of stiff competition.

Infosys currently holds a cash balance of roughly USD 4 billion. This has brought up views from various fronts in terms of how it can be used to benefit the company. It can either be paid back to shareholders in the form of special dividend or it can be used for acquiring a company in the European market to increase local presence and help tap the market better.

In Infosys’ annual general meeting on June 9, K V Kamath, chairman of Infosys Technologies, advised the company to work on its acquisition to turn things around. He advised the buyout to be of a minimum ticket size of USD 1 billion. In the meeting, shareholders urged the company to use reserves for its acquisitions or to return it to shareholders by issuing a special dividend.

Special Dividend

Over the last three months, the share price of Infosys has declined 13.88 per cent from Rs 2,870.35 to Rs 2,472.00. The double digit downfall has been caused by missed guidance for Q4 2011-12 and lower guidance for Q1 2012-13 and FY 2012-13. Infosys has forecasted an 8-10 per cent increase in sales for the year 2012-13 as against NASSCOM’s guidance of 11-14 per cent and Cognizant’s 20 per cent. TCS, Wipro and HCL do not provide yearly forecast figures but appear more optimistic. A dividend payout would boost market sentiment and cover up, to some extent, the decline Infosys has seen over time.

Acquisition

Infosys is seeking a European deal to increase its presence in the region and to focus on new lines of business. The western European market, sized at USD 211 billion last year, is the second-biggest market after North America, according to IDC. Moreover, the demand for outsourcing is on a rise in Europe over the last two years and now accounts to about 50 per cent of the world’s outsourcing deals. The revenue generated from Europe by Infosys stood at 21.9 per cent in FY 2011-12. This clearly shows the potential for expanding presence and activity in the region.

Due to the sovereign debt crisis, IT companies in the region are trading cheap and Infosys can manage grabbing a good deal. The acquisition of one of these currently undervalued companies would help gain local presence and increase overall revenues considerably. In 2008, the company bid to acquire UK-based Axon Group Plc and was outbid by HCL who acquired the firm for USD 658 million. With the cash reserves it holds at the moment, it can spend as much as USD 500 million on a single European purchase, according to a top executive at Infosys.

Our Say

We at DSIJ believe that while higher dividends would improve market sentiment for the firm in the short run and simply channelise money differently, an acquisition would result into value addition and help drive the company to gaining and maintaining its position in the long run. There has been a decline in the key markets that Infosys operates in. Geographically, North America contributes to more than 62 per cent of the overall business. Industry-wise, banking, financial services and insurance (BFSI) contributes to more than 34 per cent of revenues. In the last quarter of FY 2011-12, revenues from North America declined by 4 per cent and BFSI declined by 4.6 per cent from the preceding quarter. These figures suggest concentration on Europe to improve performance.

Questions are being raised over Infosys’ maintaining its stance on sticking to higher margins regardless of market conditions rather than concentrating on market share. Cognizant, the company that gained third position by putting Wipro behind last year, has been displaying aggressive growth over the years and has come very close to the revenue figures of Infosys. A deal would clearly help Infosys add value to its business and boost revenues from places where there is potential for growth. It would help maintain its position in the increasingly competitive market and improve its long-term standing.