BANGALORE Dec 17 Infosys, India's No.
2 software services provider, may cut its revenue forecast next
month as U.S. business clients defer spending and balk at
signing big deals.
The outsourcing icon, which has missed its own revenue
guidance in three of the past four quarters, has struggled as
its big customers cut costs, and analysts have criticised
management for sticking with a rigid pricing policy when
competitors have offered more flexible plans.
Infosys executives have sounded downbeat in recent
interviews and in meetings with analysts, citing client troubles
ranging from Hurricane Sandy-related shutdowns to worries about
the U.S. "fiscal cliff" of tax hikes and spending cuts.
"From what they've been saying in various conversations,
it's not unlikely that they will cut guidance," said Ambit
Capital analyst Ankur Rudra, who has maintained a "sell" rating
on Infosys shares since January 2011.
An Infosys spokeswoman declined to comment, noting that the
company is in a mandatory quiet period ahead of its earnings
results due in January.
With about 60 percent of its business in the United States,
Infosys is particularly vulnerable to swings in U.S. corporate
sentiment and has been hit hard by spending deferrals.
Diviya Nagarajan, an analyst at UBS, wrote in a Dec. 6 note
to clients that the company's growth forecast for the fiscal
year ending in March could be under threat because of cutbacks
on large projects and delays in closing deals.
UBS organised an investor meeting on Dec. 6, featuring
Infosys Chief Executive Officer S.D. Shibulal.
Longer-than-expected client shutdowns due to Hurricane
Sandy, especially in the manufacturing sector, were also hurting
Infosys, wrote Nagarajan in her report.
Infosys's guidance of 5 percent dollar revenue growth for
the current fiscal year compares with an estimate of 11 percent
for the sector by the National Association of Software and
Services Companies, or NASSCOM.
Infosys, for years an investor favourite for exceeding its
targets, stopped providing quarterly guidance in July after a
string of disappointing results. It now provides only an annual
It is expected to update its outlook for the fiscal year
ending in March when it reports quarterly results on Jan. 11.
A forecast cut would be the second this fiscal year. In July,
Infosys halved its dollar revenue growth estimate from as much
as 10 percent - forecast in April - to 5 percent.
LEANING OVER THE CLIFF
Long the sector bellwether, Infosys is in the midst of a
strategy shift that it calls "Infosys 3.0" as it tries to
diversify away from businesses that have become commoditised. It
is focusing on developing its own software and building
At the same time, industry insiders say, it is quietly
becoming more flexible on its premium pricing, given fierce
"Things have become challenging, because in the U.S., which
is the largest market for all of us, the fiscal cliff is still
not resolved, they are still talking about it, there is a lot of
uncertainty, so all the corporates are sitting tight on their
spending," V. Balakrishnan, who was previously chief financial
officer and now heads three Infosys units, told reporters on
The company is also heavily exposed to discretionary
spending in the financial sector. While such business is
lucrative during good times, it is vulnerable when the industry
"Previously, the banks would come and talk to us, you know.
Now, discretionary projects, they can pull the plug with 48
hours notice," Infosys CFO Rajiv Bansal told Reuters on Dec. 8.
Infosys shares are down almost 18 percent this year,
compared with a 7 percent gain for larger rival Tata Consultancy
Services and a 3.1 percent fall for the sector index
. That compares with a 25 percent gain for the broader
Some investors are betting the stock will continue to fall.
Nearly three-quarters of Infosys American depositary receipts
that can be borrowed are out on loan, compared with an average
of about 8.7 percent for all ADRs, according to data from Markit
In the nine months ended September, Infosys's operating
profit dropped about five percentage points as a proportion of
revenue, from 31.2 percent for the quarter ended December 2011
to 26.3 percent, according to data on the company's website.
Cowen and Co analysts downgraded Infosys to "neutral" from
"outperform" on Dec. 3, expecting it to have a "protracted
revenue growth recovery."
In a Cowen survey of IT buyers, Infosys scored poorly,
behind competitors such as Cognizant Technology Solutions Corp
, on both new client additions and project workload,
which the analysts define as spending intentions from existing
and new clients.
U.S. based Cognizant expects to end the year to December
with 20 percent revenue growth.
Infosys's difficulties stand in contrast with commentary
from larger rival TCS, which is known to be more flexible on
pricing and has maintained that it will beat NASSCOM's estimate
this year and that next year will be even better.
Cognizant and India's HCL Technologies have also
been winning market share by being more flexible on pricing,
which puts more pressure on Infosys at a time when customers are
hesitant to add new spending.
"While the net new scope of work hasn't been increasing
greatly, a large number of contracts of significant value are
coming back to the market as renewals or recompetes," said
Siddharth Pai, partner at Information Services Group, which
advises global clients on outsourcing strategies.
"Our data suggests that incumbents win these contracts the
majority of the time, but each renewal constitutes an
opportunity for a rival to displace the incumbent," he said.