Sluggish outlook for Infosys

Revenue falls short of market expectations.

By R. Chandrasekaran

Technology bellwether and India’s second largest software exporter Infosys delivered its fourth quarter profits that modestly topped expectations. However, the company is seeing growth below than what the industry body expects. Is this a trend that other major IT companies are likely to repeat too or is it confined to Infosys only?

Infosys reported net profit of Rs.23.9 billion or $438 million for the fourth quarter versus Rs.23.16 billion representing a year-over-year growth of just 3.2 percent, today. This is in comparison to revenue growth of 18 percent to Rs.104.5 billion thus indicating the margin pressure. While profit came in above analysts’ expectations of Rs.23 billion, revenues fell shy of consensus of Rs.107 billion.

In the third quarter, Infosys has not only delivered better than expected results, but has also lifted its outlook slightly for the fiscal year 2013. Therefore, the market was expecting Infosys to narrow the gap between itself and the leader Tata Consultancy Services. However, the company provided an outlook that not only fell short of market expectations, but is also below the trade body, National Association of Software Service Companies or NASSCOM, forecast for the next fiscal year.

Shares of Infosys, which lost more than 15 percent in 2012, managed a gain over quarter percentage in 2013 before the announcement of the results on the strength of improved market conditions for IT and ITES. However, the stock had lost about 18 percent during the Indian stock market trading after the outlook failed to impress investors.

The big disappointment is the 6 – 10 percent revenue growth in dollar terms for the next fiscal year. While analysts were predicting Infosys to guide 12 percent revenue upside, NASSCOM expects 12 – 14 percent growth in the same period. Therefore, it looks like the growth is a company specific problem. This could be seen from the reported comment made by Globe Capital CEO K.K. Mital. He reportedly viewed that when mid-cap companies are estimated to provide better than Infosys outlook in terms of percentage, he believed that it was more a company-specific issue.

The growth concern is clear from other analysts too. For instance, Infosys revenue growth was fuelled by the Swiss consultancy Lodestone, which was acquired in the previous year, whereas organic growth remained flat.

There are other factors such as pricing and margins causing concerns. While operating margins dropped by two percentage points, pricing slipped 70 basis points in the fourth quarter.

However, Infosys sees the deal pipeline is slightly better than the last year. The company expects to face pricing and margins pressure in the near term.

The second largest software exporter has been under tremendous pressure from its rivals such as TCS and HCL Technologies and has been losing its share in the last 6 to 8 quarters.

Speaking to the media, Infosys CEO and managing director S.D. Shibulal said, “Global economic uncertainties remain challenging for the IT industry. We are progressing well on our strategic direction of building a high-quality company which is relevant to our clients. We are making all the investments necessary to differentiate ourselves in the market place while positioning ourselves as a partner of choice for our clients.”

If the last year is any indication, TCS, HCL Technology and Cognizant Technology Solutions performed better than Infosys. Therefore, there is a strong belief among the analysts that the growth concern is restricted to Infosys only and expects other IT companies to perform better than Infosys. However, there is no denying fact that Infosys had deeply hurt market sentiments.

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