BANGALORE: Phaneesh Murthy, Indian IT industry's ace salesman, displayed aggression in paying $1.2 billion for Patni Computers in 2011 but nearly two years later Street is still a reluctant buyer of the story of iGate, where he is the chief executive.
Bank-rolled by private equity firm Apax Partners, iGate bought Patni with the stated intent of bulking up, hoping to get invited to larger technology outsourcing deals. Even as the Fremont, California-based company is keen to articulate its $3-billion sales target by 2017, analysts are not impressed with the post-acquisition progress.
"We have been skeptical about the deal for some time," said Vincent Colicchio, a senior analyst at US-based brokerage Noble Financial Capital Markets referring to acquisition of Patni, then nearly three times iGate's size.
While iGate expected the buyout to help it join the big league of Indian IT providers, analysts said it has not only grown slower than the overallIT industry but have also lost market share over the past year, taking a toll on the Street's confidence in the stock.
The only reason that can explain the relative underperformance of iGate is probably the time taken to integrate and assimilate Patni, which not only had different culture but was also much bigger in size, according to Pradeep Mukherji, president and managing partner at outsourcing advisory Avasant.
Shares of Nasdaq-listed iGate tumbled almost 22% on Nasdaq over the past one year, besides missing analysts' revenue forecast in the September quarter - iGate posted $271 million in sales, as against consensus analyst forecast of $277 million.
At 11x, the price to earnings (PE) multiple, a commonly used indicator of Street's confidence in the future growth, iGate lags industry significantly. In comparison, Wipro enjoys a PE multiple of 17 while Cognizant's is 19. Even Infosys, the slowest among Indian Tier-I software services exporters, enjoys a multiple of 14.5 on Nasdaq.
"While they have recently hired a new sales manager (its new North America head), we need to see improvement in the deal pipeline before we become confident in the story," said Colicchio adding that only faster growth could help regain investor confidence.
iGate's active client base has fallen from 344 to 293 in just one year. But that is intentional, according to the management as the company chose not to renew contracts with some 70 clients that were either not profitable or strategic.
Sanjay Tugnait, a former managing partner at Accenture who recently took over as iGate's North America sales head, said that the company is focusing heavily on consulting-led growth. To get better access to client boardrooms, iGate is spending a million dollars on hosting a CEO golf tournament in January, in the US, their largest market.
Brokerage firm Nomura called iGate's two large deal wins in the last quarter "reassuring", but said project ramp downs and delayed decision making by clients could lead to growth moderation in the coming fiscal year.
However, despite criticism Murthy insisted that iGate stands tall on the growth front.
"I am happy with the revenue pipeline. The kind of large deals that we are in sight of, in the range of hundreds of millions of dollars each, is testimony to a successful integration exercise and acceptance of our outcomes based model," Murthy said. "Such deals weren't in the reach of either of the two companies in their earlier forms," added the 48-year-old, credited with taking Infosys' global sales from $2 million to $700 in 10 years.
But to join the league of India's top IT services providers, Murthy will need to do more.
"Given the current growth challenges that IT companies face, $3 billion sales target in five years may not be achievable through business alone," said Avasant's Mukherji. "The only way to attain the target is by another acquisition. Since iGate wants to be in the big league, it makes sense to acquire a BPO firm.
Bank-rolled by private equity firm Apax Partners, iGate bought Patni with the stated intent of bulking up, hoping to get invited to larger technology outsourcing deals. Even as the Fremont, California-based company is keen to articulate its $3-billion sales target by 2017, analysts are not impressed with the post-acquisition progress.
"We have been skeptical about the deal for some time," said Vincent Colicchio, a senior analyst at US-based brokerage Noble Financial Capital Markets referring to acquisition of Patni, then nearly three times iGate's size.
While iGate expected the buyout to help it join the big league of Indian IT providers, analysts said it has not only grown slower than the overallIT industry but have also lost market share over the past year, taking a toll on the Street's confidence in the stock.
The only reason that can explain the relative underperformance of iGate is probably the time taken to integrate and assimilate Patni, which not only had different culture but was also much bigger in size, according to Pradeep Mukherji, president and managing partner at outsourcing advisory Avasant.
Shares of Nasdaq-listed iGate tumbled almost 22% on Nasdaq over the past one year, besides missing analysts' revenue forecast in the September quarter - iGate posted $271 million in sales, as against consensus analyst forecast of $277 million.
At 11x, the price to earnings (PE) multiple, a commonly used indicator of Street's confidence in the future growth, iGate lags industry significantly. In comparison, Wipro enjoys a PE multiple of 17 while Cognizant's is 19. Even Infosys, the slowest among Indian Tier-I software services exporters, enjoys a multiple of 14.5 on Nasdaq.
"While they have recently hired a new sales manager (its new North America head), we need to see improvement in the deal pipeline before we become confident in the story," said Colicchio adding that only faster growth could help regain investor confidence.
iGate's active client base has fallen from 344 to 293 in just one year. But that is intentional, according to the management as the company chose not to renew contracts with some 70 clients that were either not profitable or strategic.
Sanjay Tugnait, a former managing partner at Accenture who recently took over as iGate's North America sales head, said that the company is focusing heavily on consulting-led growth. To get better access to client boardrooms, iGate is spending a million dollars on hosting a CEO golf tournament in January, in the US, their largest market.
Brokerage firm Nomura called iGate's two large deal wins in the last quarter "reassuring", but said project ramp downs and delayed decision making by clients could lead to growth moderation in the coming fiscal year.
However, despite criticism Murthy insisted that iGate stands tall on the growth front.
"I am happy with the revenue pipeline. The kind of large deals that we are in sight of, in the range of hundreds of millions of dollars each, is testimony to a successful integration exercise and acceptance of our outcomes based model," Murthy said. "Such deals weren't in the reach of either of the two companies in their earlier forms," added the 48-year-old, credited with taking Infosys' global sales from $2 million to $700 in 10 years.
But to join the league of India's top IT services providers, Murthy will need to do more.
"Given the current growth challenges that IT companies face, $3 billion sales target in five years may not be achievable through business alone," said Avasant's Mukherji. "The only way to attain the target is by another acquisition. Since iGate wants to be in the big league, it makes sense to acquire a BPO firm.
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