The Sleeping Tiger

Somnath is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

India’s software industry is still a sleeping tiger waiting to be awakened. We all know that, even while resting, tigers are impressive - other animals are careful to give them respect. Yet only when a tiger is awake and engaged can we appreciate its force and majesty.

Tiger on the prowl

Infosys Ltd ADR (NYSE: INFY), one of India’s largest software exporters, is expanding into management consultancy by acquiring the Switzerland based Lodestone Holding AG for $349 million. Lodestone Holding AG has 750 consultants and 200 clients.

Lodestone is expecting to earn about $270 million in the current fiscal year, with about half coming from Switzerland and 23% from Germany. IT companies around the world have been moving into management consultancy due to its higher margins and increasing demand and Infosys looks to be about a year behind the curve. The acquisition will expand Infosys's customer base to include some Fortune-500 companies like BMW, and Deutsche Telekom, Europe's largest telecom company. Infosys will have an opportunity to provide IT services as well to Lodestone's high profile customers.

Infosys is also aiming to earn 40% of its revenues from Europe in the current year as opposed to 22% earned last year; the Lodestone acquisition is part of that strategy. It has targeted France and Germany as its greatest opportunities since the two countries spent more than $178 billion last year on IT goods and services combined.

With a P/E of 15.47, it’s a strong company to invest in. The company is on a growth path with revenue growth of 15.27% and earnings growth of 11.65%. The current debt/equity ratio is low with 15.29%.       

Closely competing the Tiger

Another Indian tiger closely competing with Infosys is Wipro Limited (NYSE: WIT) which is also a global information technology (IT), services company. It provides a range of IT services, software solutions and research and development services in the areas of hardware and software design to companies worldwide. With a P/E of 19.82, it is a good buy. The company is on a growth path with revenue growth of 16.72% and earnings growth of 13.23%. The current debt/equity ratio is low with 21.05%.      

The other close competitor is definitely Cognizant Technology Solutions Corporation (NASDAQ: CTSH), provider of custom information technology, consulting, and business process outsourcing services. The company is engaged in technology strategy consulting, complex systems development and integration, enterprise software package implementation and maintenance, data warehousing, business intelligence and analytics, application testing, application maintenance, infrastructure management, and business and knowledge process outsourcing (BPO and KPO). With a P/E of 21.76, it is a good buy. The company is on a growth path with revenue growth of 31.06% and earnings growth of 26.89%. The current debt/equity ratio is low with 15.29%.         

Cognizant’s shares have jumped 18 percent since the end of June, compared with 6.9 percent for the American depositary receipts of Infosys. Cognizant completed 14 acquisitions in the past decade, focusing on software, computing and consulting services, according to data compiled by Bloomberg. Infosys meanwhile has announced 12 acquisitions, including outsourcing back-offices of Citigroup Inc. and Koninklijke PhilipsElectronics NV, and the consulting firm Lodestone Holding AG. Rather than raising the share of revenue from consulting, Infosys has set a goal to expand revenue by selling software products.

Organic or Inorganic - Tiger leads anyway

The management of Infosys insists that the fall in stock is only temporary and with their current strategy of expansion in Europe and shift into consultancy, Infosys is looking to be back on track to growth sooner rather than later. Infosys is a long way from getting back to an organic growth path and will have to move quickly into the growing markets in Southeast Asia to find their next way forward.

By acquiring Lodestone Holding earlier this month, Infosys indicated that the company will not hesitate to growth inorganically. The acquisition will not only help Infosys realize its plan to focus more on high-margin verticals, but will significantly enhance Infosys' presence in continental Europe. So despite the hullabaloo surrounding Infosys in the past 2-3 months, and despite a slightly weak performance by the company in the recent quarter, I see no reason to change my long term view on the stock.


SomnathGuha has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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