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Monday, July 30, 2007

Infosys Wins $250M Contract From Philips

Indian software services giant Infosys on Wednesday said it had bagged a $250 million outsourcing deal from Royal Philips Electronics and would acquire three of its service centers for $29 million.

It is among the largest finance and accounting business-process outsourcing contracts won by an Indian company, Infosys said in a statement. Through the deal, Bangalore-based Infosys (nasdaq: INFY - news - people ) will take over Philips back-office centers in India, Poland and Thailand with 1,400 employees.

India’s second-largest software company has trailed the other two biggies, Tata Consultancy Services and Wipro (nyse: WIT - news - people ), when it comes to acquisitions. This is its first since 2003, when it bought Australia’s Expert Systems for $23 million. But Infosys management has consistently said they’re looking to grow in foreign markets through acquisitions. At the end of June, the company had cash and cash equivalent reserves of $1.6 billion.

“Looking at the history of acquisitions [in India], a majority of them do not deliver value. You need to be very careful when you consider acquisitions, and they’re not something we’ll be doing every day,” Infosys CEO S. Gopalakrishnan told from Bangalore. However, he added that the company was open to making acquisitions in Japan, Australia, China, Europe and India.

“The Philips deal is not that significant in terms of size, but strategically, it will enhance our capability in the finance and accounting arena and give us a center in Poland that we can leverage as we reach out to new clients,” said Gopalakrishnan. Infosys’ business-process outsourcing revenues were $49.75 million in the June quarter, up 75% from the corresponding quarter last year.

“While absorbing 1,400 employees with valuable language and domain skills may have its merits, this could also set a new precedent in what Infosys deems acceptable by way of upfront margin dilution,” said Ashish Thadani, senior vice president, research, at Gilford Securities.

As with most Indian software concerns, the U.S. accounts for a majority of Infosys’ revenues. But with the rupee appreciating nearly 7% in the quarter that ended in June, their profits took a hit. Infosys has revised its annual guidance downward. (See: “ Investors Bail Out Of Infosys On Forex Headwinds”)

Gopalakrishnan, who took over as CEO last quarter, said the company’s immediate challenge was to address the impact of rupee appreciation by balancing out the company’s sources of revenue geographically, diversifying its services and increasing revenues per employee. With the fight for talent intensifying, Infosys had an attrition rate of 13.7% last quarter, losing about 2,000 employees.

Infosys shares gained 0.7% to close at 1,989.95 rupees ($49.50) Wednesday on the Bombay Stock Exchange. The deal was announced after the Indian markets closed.

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