Infosys fell short of a revenue target it lowered twice during the financial year and forecast that growth would be anaemic, causing investors to dump a stock once regarded as the bellwether for the Indian software industry.
With its forecast of 8-10% revenue growth during the year to March 2013, Infosys’ guidance trails the growth estimate for the industry by Nasscom and puts it in serious danger of being overtaken by rival Cognizant as the second largest software exporter.
Other than the mortification of losing its place in the software industry pecking order, Infosys’ under performance could mean that it risks losing the confidence of investors and analysts who could question whether the management has a coherent strategy that is capable of delivering growth while protecting margins.
“Infosys has been most disappointing; it is below all estimates. It seems more company-specific rather than a problem with the sector,” said Sanjeev Hota, assistant vice president for research at Mumbai-based brokerage Sharekhan.
Indication of the Street’s disappointment came from the way the company’s shares were pummeled – the Infosys stock fell by nearly 13% on Friday the 13th, regarded a day of bad luck by many.
The shares lost Rs 20,000 crore in value in a single day and recorded the steepest fall in 30 quarters. In the financial year that ended in March, Infosys grew its revenues by 15.8% to $6.99 billion (Rs 33,734 crore) while profits grew 14.5% to $1.72 billion (Rs 8,316 crore).
At the beginning of the financial year Infosys said it would grow revenues by 18-20% but later lowered that to 16.4%. “This is a statement of fact; this is our reality based on our client base,” Chief Executive Officer SD Shibulal said of the growth forecast. “We state it as we see it.”
Infosys blamed developments in the final month of the January-March quarter for missing revenue forecast, saying there was a decline in spending on regulatory compliance in the US and hesitation to fund programmes won by it because of personnel changes at two major clients.
Compared to the December quarter, revenues fell by 2% and income rose by 1.1% to $463 million.
Stock may be downgraded
Infosys announced a special dividend of Rs 10 per share (to mark 10 years of its BPO business) in addition to a dividend of Rs 22, involving a total payout of Rs 1,870 crore.
During the quarter ending in June, it said revenues would be barely changed from the three-month period in March.
“Infosys’ FY13 guidance of 8-10% revenue growth is disappointing. The company’s guidance of 0-1.1% quarter-on-quarter revenue growth in a seasonally strong first quarter is even more disappointing,” said Saibal Ghosh, chief investment officer of Aegon Religare Life Insurance.
“Company-specific scepticism may now result in consensus downgrading of the stock.”
Despite the volatility with some clients, Infosys said it closed five large deals in the last quarter, with at least three of them bigger than $100 million in value. Bank of America and UBS are Infosys’ largest clients.
The feeble guidance comes at a time the US economy, which contributes nearly 60% of the revenues of the $100-billion Indian IT industry, has been stabilising. For a year now, Infosys has been the laggard among large Indian IT services providers such as Tata Consultancy Services, Cognizant, HCL Technologies and Wipro.
While rivals such as HCL and Cognizant have been chasing revenue and market share growth, sometimes at the cost of profit, Infosys is seen as having lesser risk appetite.
“Our margins would have rushed to the toilets like that of the others if we had hit this air bump while chasing high-volume, low-margin business,” said Ashok Vemuri, who heads the banking and capital markets for the company, in defence of Infosys’ strategy of chasing higher margins.
But an analyst with a foreign brokerage blamed the top management for the lacklustre performance in recent quarters.
“At this point, it is extremely difficult to predict where the overall growth of the company is headed. They may not be able to report high growth at least till the end of FY13. The company doesn’t seem to have much momentum as of now.”
In a reflection of its lower growth expectation, the hiring target for the year has fallen from a year ago. In the year to March 2013, Infosys plans to hire 35,000 compared to 45,000 last year. As work volumes come down, more Infosys employees are sitting idle, with only 67% of its nearly 1.5 lakh employees working on active revenuegenerating projects.
While Infosys struggles to maintain revenue growth, the fluctuating local currency is making it harder. “The rupee will be under pressure somewhere in the range of Rs 50-54,” said V Balakrishnan, the chief financial officer.
Infosys’ “big miss on various counts” will inevitably raise questions among investors about the health of the sector, JPMorgan wrote in a note to clients after the earnings announcement.
But Balakrishnan said the market has its own way of looking at things and reacting. “We can’t be too concerned about that. Companies can’t be run based on market reactions. You have to take decisions in the interest of the company’s long-term goals.”