Skip to main content

Infosys Exports a Buying Opportunity

As global IT outsourcing expands, the company increases exposure to the U.S. equity market.
  • Author:
  • Publish date:

Need more evidence that offshoring of IT services is here to stay?

On Thursday, India-based



is expected to price some 14 million American Depositary Receipt shares -- worth about $1 billion -- and sell them on the U.S. market next Monday.

If completed as expected, it will mark the largest single-equity issuance by an Indian IT company in the U.S., says Joseph Vafi, an analyst with Jefferies & Co. Of the approximately 277 million shares currently outstanding, only 8% trade as ADRs. The remainder trade in India. A successful deal will bring the U.S. float to 13% to 14% of the outstanding shares.

Infosys, which has converted once before, is not creating new shares, however: The company is buying shares from local investors in India, whose holdings are discounted vs. the ADRs. What immediate effect the conversion will have on the company's share price is not clear.

Analyst Trip Chowdhry of FTN Midwest Research thinks Infosys is likely to take a short-term hit when the new ADRs become available simply because of increased supply. But longer term, Chowdhry is bullish on the company and much of the outsourcing sector. "Longer-term trends, such as

Sarbanes-Oxley compliance, lower costs offshore, and the need to replace software and hardware favor Infosys and



," he said.

Chowdhry has a buy and a target price of $80 a share on Infosys; his company does not have a banking relationship with Infosys and he owns no shares. Shares of Infosys were recently up 5 cents to $68.10.




, the world's largest software company, has turned to India for help finishing the code for Longhorn, the next generation of the Windows operating system, says Chowdhry. "They are outsourcing engineering services, like device drivers, to Wipro," he noted. Microsoft confirmed it has business dealings with Wipro, but wouldn't reveal any specific operations.

Vafi, however, said there could actually be an upward bounce in Infosys next week, primarily because he expects short-sellers to unload shares. Indeed, short-sellers have been bailing for at least a month, but with 4.8 million shares currently short, it would still take more than six days for those positions to be covered. Jefferies does not have a banking relationship with Infosys; Vafi does not own it.

In April, Infosys issued disappointing guidance for the quarter, saying, ironically enough, that large customers were distracted by the need to finish Sarbanes-Oxley compliance projects. Making matters worse, two other major customers were reorganizing during the quarter, and not in a position to close deals.

Other outsourcers also had difficulties in the early spring and most of the sector lost ground on Wall Street. For its part, Infosys lost nearly one-quarter of its value between early March and late April, but has since rebounded. In just under a month, the stock has gained 21%, amid expectations of a strong second quarter.