Infosys' slower revenue growth outlook slams shares

BANGALORE Fri Apr 13, 2012 10:18pm IST

S.D. Shibulal, chief executive officer of Infosys, speaks during the announcement of the company's quarterly financial results at their headquarters in Bangalore April 13, 2012. REUTERS/Stringer

S.D. Shibulal, chief executive officer of Infosys, speaks during the announcement of the company's quarterly financial results at their headquarters in Bangalore April 13, 2012.

Credit: Reuters/Stringer

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BANGALORE (Reuters) - Infosys disappointed investors on Friday with a weaker-than-expected revenue growth outlook due to an uncertain global economy, sending its shares plunging more than 12 percent in their biggest fall in nearly three years.

The forecast from India's No.2 software services exporter sparked worries about prospects for the country's $100 billion outsourcing sector, which faces slowing demand from its western clients, intense competition from global rivals and volatile currency markets.

Shares in Infosys, once seen as a sector trend-setter, plunged as much as 12.5 percent by 2:51 p.m., the biggest one-day fall since May 2009, to 2,405 rupees. The fall wiped off more than $3 billion from the company's market value.

(Click here to track how Infosys shares performed)

The BSE Sensex was down 1.4 percent.

Infosys said it expects dollar revenues to grow 8-10 percent for the year ending March 2013 to $7.55 billion-$7.69 billion, lower than most analysts' expectations of 10-15 percent growth.

"Clearly, there is no immediate recovery in sight for the industry with expectations that the environment will continue to remain challenging," said Dhiraj Sachdev, senior fund manager at HSBC Asset Management in Mumbai.

"However, there is one thing we need to keep in mind. This is the first quarter when the budgets are just prepared and in the planning stage so we will get more clarity on how the year will go when we are a few months into it."

(Graphic on Infosys results, click link.reuters.com/jaf67s

Read what the experts are saying about the results, click here)

Bangalore-based Infosys said consolidated net profit for the fiscal fourth quarter ended March 31 rose 27.4 percent to 23.16 billion rupees from 18.18 billion rupees a year earlier.

Analysts had forecast a net profit of 23.18 billion rupees for the company, whose customers include Procter & Gamble Co and Volkswagen AG, according to Thomson Reuters data.

CHALLENGING YEAR

Reflecting concerns about the outlook for the Indian outsourcing sector, the information technology market index fell more than 8 percent, while sector leader Tata Consultancy Services (TCS.NS) was down nearly 6 percent and Wipro (WIPR.NS) dropped 5 percent.

"We will have to wait for Tata Consultancy and Wipro results to see if this is more to do with the macro economic situation or there is some company-specific issue," said Shradha Agrawal, analyst at Batlivala & Karani, referring to Infosys.

"Infosys stock has room for more correction."

Infosys, Tata Consultancy Services, and No.3 exporter Wipro, part of the country's showpiece and export-driven outsourcing sector, have benefited from cost-conscious overseas customers bumping up demand.

But sluggish global economic growth, the euro zone debt crisis and growing U.S. rhetoric against the outsourcing of jobs ahead of the November presidential election have triggered worries about a decline in outsourcing demand.

Barclays said Infosys' results and the growth guidance would likely start a fresh debate on not just "structural issues" with the company but also expected demand for IT services this year.

The Indian outsourcing industry gets about three-quarters of its revenue from the United States and Europe.

"The year ahead looks challenging for the IT services industry, with slow recovery in the global markets," said S.D. Shibulal, chief executive officer of Infosys.

Infosys has seen order "ramp downs," or cutbacks on spending, from various clients, especially those in the financial services sector, he added.

Tata Consultancy, Infosys, and Wipro also face increased competition from global rivals like IBM (IBM.N) and Accenture.

Worldwide IT spending is forecast to increase 2.5 percent in 2012 from a year ago, research firm Gartner said early this month, lower than its January forecast of 3.7 percent growth. It cut the forecast due to a strong U.S. dollar.

CASH BALANCE

Infosys expects its earnings per American depositary share to be in the range of $3.12 to $3.17 in the year ending in March 2013, up 4 percent to 5.7 percent from a year earlier.

"The economic volatility is so much, clients will fine-tune their spending according to what they see in the environment," said chief financial officer V. Balakrishnan.

"For anybody to stand up in the beginning of the year and guide for the full year is still a very bold thing."

Revenue for Infosys rose 22 percent to 88.52 billion rupees in the March quarter as it added 52 new clients.

The company expects its operating margin in the quarter to end-June to be 200 basis points lower than the preceding quarter due to hiring charges and visa-related costs, Balakrishnan said.

Nasdaq-listed Infosys plans to add 35,000 staff in the year to March 2013 to its current headcount of 149,994.

The company, which has shied away from large acquisitions despite sitting on a huge cash pile, said its cash balance was $4.1 billion at the end of March.

Infosys also denied reports that it had misused short-term U.S. business visas for sending employees into its largest export market, which brought in 62 percent of its revenue in the quarter ended March 31.

Jack Palmer, a company employee, has reportedly accused the company of misusing the short-term B1 visitor visa to send staff from India and allowing them to work there due to higher wage requirements of the local engineers there.

Infosys said in January it was being investigated in Texas over sponsorship of B1 visas.

"Any allegation or assertion that there is or was a corporate policy of evading the law in conjunction with the B-1 visa program is simply untrue," it said in a statement on Friday.

(Writing by Sumeet Chatterjee; Editing by Matt Driskill & Kim Coghill)

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Comments (5)
figoinchicago wrote:
The second statement I do not subscribe to is by Dhiraj. He believes there is hope since this is still the first quarter and clients are still in the planning stages. This can’t be further from the truth, almost all customers start their planning cycle for the next fiscal year in October and have their budgets and project allocations in place by January. By mid-April Infy should have an accurate estimate of what the client intends to spend. Besides, if large engagements are not locked in during the first four months of the calendar year, it’s unlikely there will be significant upsides in coming months.

Apr 13, 2012 12:03pm IST  --  Report as abuse
figoinchicago wrote:
The third statement that I do not subscribe to is by Balakrishnan. I’m not sure what he’s complaining about, the INR has weakened significantly against the $ € £ these past 4-6 months, this means Infy gets more INR for the same billing rates (which I’m sure Infy does not peg to the INR). He somehow seems to make it sound as if that’s a bad thing!

Apr 13, 2012 12:08pm IST  --  Report as abuse
figoinchicago wrote:
Here’s what I think is going wrong with Infy -
1. Clients are no longer willing to give Infy a premium.
2. Competition is intense, Indian peers are willing to pick up business at lower margins, Global competitors have their own centers in low cost locations. Captives are growing as well.
3. Disruption due to organization changes made last year.

Apr 13, 2012 12:14pm IST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

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