New Delhi: Talking about the proposed tie-up between Capgemini and Infosys, Ramesh Damani, Member, BSE is of the view that the tie-up could be for a BPO arm.
He speculates that the tie-up could work for both the companies as it’s a growth area. He said that Infosys is not looking at diluting its equity capital. He told moneycontrol.com that handling Rupee appreciation will be a huge challenge for IT companies. Large tech companies will face margin pressure in the next two years.
Excerpts fromCNBC-TV18’s exclusive interview with Ramesh Damani:
Q: About five-six years ago, at the height of the 2000 boom, you were a very strong advocate of Indian companies going out and using their stock as currency to buy up large companies like Capgemini. Is it still a good idea?
A: I think with reflection of time, the window of opportunity is already been closed down. If you just look at the deal right now, Capgemini is a company that was at one time sale, at 5 per cent margin; Infosys goes at 8 times sales, almost more than 30 per cent margin. Infosys now has huge challenges; recruiting staff, maintaining its margins, because the rupee has been appreciating so strongly.
My sense is that that window that was open to them, has passed. Infosys consistently said that they are looking more for cultural fits, more for niche businesses. I do not think it meets that criteria but if I were to speculate, it could be a tie-up between Capgemini and Infosys for their BPO arm that would make more sense, because that is a fast growth area and an area where both could help each other.
Q: So not a takeover, and if anything, it could be more a partnership?
A: Yes, particularly for the BPO. Infosys renamed Progeon to Infosys BPO. Capgemini has very aggressive plans in the BPO sector, it’s something that logically they would need to come to India and be partners with someone like Infosys. It would make a lot of sense. But for Infosys, to follow this kind of acquisition, how they finance it, it’s a big deal to bite off right now. My sense is that because Indians have taken over, there are rumours flying around. But I would seriously doubt it.
Q: Traditionally it’s been extremely reticent in making inorganic moves. About 11 per cent revenues comes from consulting for Capgemini. What do you make of the flurry of activity and talk when such news begins to see pout?
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A: It’s a liquidity driven global bull market. Every deal is possible when the cost of debt is cheap and when money is available. But Infosys has always respected its equity capital and it’s not going to dilute its equity. I think, it’s happy with the kind of growth rate it has had in the past, as have all the shareholders.
I think it’s more to do with the current state of the market, where every deal is doable – private companies go public, the public companies go private. It’s more with the M&A people, rather than with any organic well thought out strategy on the part of Infosys and Capgemini.
Q: What’s the road ahead for Indian companies with the Rupee in a secular bull run? What’s the way forward for Indian tech companies?
A: It’s going to be huge challenge, I think they would have to look for answers to countries like Japan, where the Yen appreciated from 365 to the dollar all the way up to 125 to the dollar and how companies like Toyota and Sony responded to that. Toyota would be a classic example – they moved up from dinky cars to Corolla, Camry and then to the Lexus, moving up the value chain.
In Infosys’ case it’s more the consulting, the product oriented businesses rather than the service-oriented businesses. And I think ultimately and sadly for the tech business is that the margins will come down. These kinds of margins are not sustainable in a free marketcap of economies. We have had a great ten years of absolutely fabulous margins and growth. The large tech companies will face margin and pricing pressure in the next few years.
Source: Moneycontrol.com
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