The battle for AXON and its implications for the Indian I.T. sector

As Ramit GUHA writes in the WSJ, the battle is raging between Indian firms INFOSYS (BOM:500209) and HCL (BOM:532281) for the takeover of AXON Group (LON:AXO), a British I.T. software company with strong value-added SAP implementation capabilities and with a foothold in the UK and in continental Europe.

This battle epitomizes the new creed among indian I.T. outsourcing companies as they try to diversify their clients base away from the ailing US market (that still represents 60% of their overseas turnover with the bulk in financial services), and as they seek to move up the value scale, away from low margin outsourcing into high margin I.T.consulting services.

So far, indian outsourcing companies like INFOSYS, WIPRO, TCL, and HCL have done relatively well both in terms of revenue generation and margin expansion, with INFOSYS being unchallenged as the industry leader both in terms of revenue growth and profitability.

But the financial meltdown in the United States is forcing Indian outsourcing companies to reinvent themselves if they want to survive. As a matter of fact, wage inflation in India has reached double digit levels this year putting a strong pressure on costs amid a shortage of skilled labour, and international competition has increased in the low end of the business from сountries such as Vietnam, Ukraine, and the Philippines.

If as we expect, the cash-rich INFOSYS succeeds in this takover battle over AXON, it will strenghten its revenue generation potential and preserve its advantage over its local and international competitors. However, it will take more time and more substantial acquisitions for INFOSYS to compete with global consulting giants such as IBM and ACCENTURE.

In this regard, the dismissed rumour that had been circulating a year ago about a potential acquisition of Paris-based CAPGEMINI, a heavyweight in the European I.T. consulting industry with a workforce of 75000 equivalent in number to that of INFOSYS, looked much more like the perfect strategic move for the Indian company ! But at that time CAPGEMINI was probably considered "too big to swallow" by the Bangalore-based conservative management. Watch out for further developments this year !

Alex Kateb

This article was also published on Seeking Alpha, the leading provider of stock market opinion and analysis, at the following URL http://seekingalpha.com/article/98193-implications-of-the-battle-for-axon-for-the-indian-it-sector