Infosys signals worse still ahead

Infosys signals worse still ahead
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First Published: Thu, Apr 16 2009. 12 42 AM IST

 Setting the pace: (from left) Infosys’ T.V. Mohandas Pai, S.D. Shibulal, Kris Gopalakrishnan and V. Balakrishnan on Wednesday. Hemant Mishra / Mint
Setting the pace: (from left) Infosys’ T.V. Mohandas Pai, S.D. Shibulal, Kris Gopalakrishnan and V. Balakrishnan on Wednesday. Hemant Mishra / Mint
Updated: Thu, Apr 16 2009. 12 42 AM IST
Bangalore: Infosys Technologies Ltd’s dollar revenue for the March quarter shrunk from that for the previous three months and the company forecast that this would also shrink in 2009-10 compared with 2008-09, a first for the software services giant, but the real significance of the company’s financial results announced on Wednesday, say analysts, could be its import for the Indian IT (information technology) services business.
Setting the pace: (from left) Infosys’ T.V. Mohandas Pai, S.D. Shibulal, Kris Gopalakrishnan and V. Balakrishnan on Wednesday. Hemant Mishra / Mint
And that, they add, could be lower billing rates and profitability, consolidation, extremely tough times for small and mid-sized IT services firms, and a growing impatience with underperforming employees in IT firms of all sizes.
In rupee terms, Infosys ended 2008-09 with Rs21,693 crore in revenue, a 30% increase over 2007-08’s Rs16,692 crore and a net profit of Rs5,988 crore, a 28.5% increase over 2007-08’s Rs4,659 crore. The company ended the March quarter with a revenue of Rs5,635 crore, 24.1% higher than the corresponding quarter of last year, and 2.6% lower than the previous quarter. Net profit for the March quarter was Rs1,613 crore.
In dollars—the main currency in which Infosys bills customers, and 64% of its revenue comes from the US—the firm’s revenue in the March quarter, $1,121 million (Rs5,605 crore today), was 1.8% lower than that for the previous quarter. Infosys ended the year to March with $4,663 million in revenue, a growth of 11.7% over the previous year, and a net profit of $1,281 million, a growth of 10.1%.
Also See In Negative Territory (Graphic)
Infosys also forecast that in 2009-10, its revenue in dollars could dip between 3.1% and 6.7%, to close between $4.35 billion and $4.52 billion. It added that earnings per share could decline by anything between 11.1% and 15.1%.
Even this forecast itself was termed aggressive by some analysts. “The guidance assumes a bottoming out in the first quarter of 2009-10, which is entirely based on the management’s visibility. We will need to wait and watch to see if it is indeed realistic,” said Tarun Sisodia, research analyst with Mumbai’s Anand Rathi Financial Services.
The numbers presented by a company that had traditionally been seen as a weathervane for the business as a whole, do not bode well for other software services firms, said another analyst. “Given the numbers that Infosys is talking about, other large caps (software firms with large market capitalization) are likely to do worse,” said Anil Advani, head of research at SBI Capital Markets Ltd.
Setting the trend
If Infosys’ estimate of its revenue for 2009-10 holds true, it will mark the first time since the company’s listing in 1993 that its revenue would have seen a decline over the previous year.
“The environment is very tough out there. Many of our clients are impacted by the financial crisis,” said S. Gopala-krishnan, chief executive and managing director of Infosys.
And customers are not making decisions, added S.D. Shibulal, the company’s chief operating officer. “It is like deer in front of headlights. Customer decisions are frozen.” He referred to a survey done by the firm and said that 89% of Infosys’ clients see their IT budget shrinking this year.
Shares of Infosys lost 2.72% on the Bombay Stock Exchange on Wednesday and closed at Rs1,370.80 each, and dragged the IT sector index down by 1.71% on a day when the exchange’s benchmark index gained 2.9% to 11,284.73.
“The range of Infosys’ guidance has increased, which shows that the company is very cautious, probably due to visibility issues,” said SBI Capital Markets’ Advani.
And the pressure on billing rates could see its profitability fall. V. Balakrishnan, chief financial officer of Infosys, said operating profit margins would go down by 3 percentage points and net margins by 2 percentage points on the back of an average drop in billing rates of 6-6.5%. The company’s selling and general accounting (SGA) expenses are also likely to go up as it redoubles efforts to land new business.
Profitability will continue to be threatened for the next few quarters, said Arvind Pandit, director at consultancy firm Hay Group’s Indian arm. Still, he added, Infosys might be better off. If Infosys, despite its brand, faces pricing pressure to the tune of 6.5%, then other software firms, especially smaller ones, could see clients bargaining harder, Pandit said.
The company said it was doing its best to mitigate the situation. Infosys’ HR director T.V. Mohandas Pai said there would be no salary increases or promotions this year. He added that Infosys would also cut its capital spending—to Rs600 crore from around Rs1,350 crore in 2007-08. “We will have zero tolerance for non-performers,” he said.
An IT expert said the ongoing slowdown was a good opportunity for Indian software services firms to rethink their business. Sabyaschi Satpathy, director at Mindplex Consulting, an IT advisory, listed creating intellectual property and increasing usage of reusable software components (which some firms have been moving towards) as some of these new models. He added that he expects to see the business to start growing again only by the middle of 2010 and that there could be some consolidation in the business.
More details on the year ahead for the Indian IT services business—according to software lobby group Nasscom, this accounted for $47 billion in exports in 2008-09 and 1.7 million jobs—will likely emerge as other large software services firms declare results.
Tata Consultancy Services Ltd will declare its results on 20 April, Wipro Ltd and HCL Ltd will do so on 22 April.
Lison Joseph in Hyderabad contributed to this story.
Graphics by Ahmed Raza Khan / Mint
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First Published: Thu, Apr 16 2009. 12 42 AM IST