Bangalore: Seventeen months after he took over as chief executive officer (CEO) of Infosys Ltd, Sarojini Damodaran Shibulal , 57, finally seems to have arrested the free fall of India’s second largest software services firm.
Infosys reported a net profit of Rs.2,369 crore for the December quarter, beating analysts’ expectations, and kept its annual revenue growth forecast unchanged in the first indication that its controversial new strategy, Infosys 3.0, is working.
Analysts had predicted that the company would see its December quarter profit decline by up to 6%, and that it could lower the revenue growth forecast for the year ending March 2013 by 1-2 percentage points. Indeed, if analysts at firms such as Barclays Capital Inc., CLSA, JPMorgan and Nomura differed, it was only in terms of how bad it could get for Infosys. Not one expected the company to maintain its revenue growth target of 5% for this year.
The December quarter numbers, then, could mark the beginning of a turnaround—if it is indeed that—for a company for which not much went right in 2012, so much so that Infosys lost its position as the bellwether of India’s $70 billion (around Rs.3.8 trillion today) information technology (IT) services business. In the three months to December, Infosys’s numbers were boosted by fresh outsourcing contracts worth $731 million from customers such as Harley-Davidson Inc.
Importantly, according to Shibulal, Infosys won around $600 million of fresh business during the quarter to deliver what he calls Infosys 3.0 services. The strategy (Infosys 3.0) focuses on new technologies and platforms such as cloud computing and mobility, and was launched when Shibulal took over from S. Gopalakrishnan in April 2011. Infosys wants one-third of its revenue to come from these new areas in the next three-five years; currently, less than 10% does.
The numbers are “definitely a reflection of our strategy and the efforts over past few quarters we have put in”, said Shibulal.
The strategy isn’t entirely free of risk.
The business Infosys has gained is through deals spanning years and is linked to the growth of its customers’ businesses. The size of this business could shrink if the macroeconomic environment in the top outsourcing markets of the US and Europe deteriorates.
“Compared to last year, one thing that’s not changed is the world in terms of macroeconomic uncertainty,” added Shibulal.
Infosys said its October-December quarter revenue grew 12.1% to Rs.10,424 crore. The company also raised its revenue growth forecast for the year ending 31 March from $7.3 billion projected in October to $7.45 billion, a sign that it may be regaining growth momentum lost to rivals such as Tata Consultancy Services Ltd (TCS) and Cognizant Technology Solutions Corp. The revised forecast includes $104 million from Lodestone Holding AG, the Swiss management consulting firm Infosys acquired last year.
Infosys closed at Rs.2,712.60 on BSE, up 16.9%, adding $4.07 billion to its market capitalization, more than the gross domestic product of Fiji, according to Reuters.
To be sure, analysts and experts tracking Infosys had based their expectations on the negative outlook of the top management in an interaction in the first week of December. Analysts at multinational brokerage firms, including Barclays Capital, Nomura International (Hong Kong) Ltd and UBS Securities Asia Ltd, cited statements by Infosys chief financial officer (CFO) Rajiv Bansal and Shibulal that the target for the year ending 31 March might be at risk.
Over past eight quarters and especially since April 2011, when Infosys co-founder Shibulal took charge as CEO, the company has found the going tough—perhaps more than at any time in its three decades of existence. In this period, Infosys’s revenue lagged peers TCS and Cognizant, the company missed its own revenue forecasts and stopped giving quarterly revenue outlook from June 2012, and investors and experts labelled it “a negative outlier”.
Infosys said in April last year that its revenue for the year ending March 2013 would grow 8-10%, but lowered the forecast to 5% after the quarter ended June.
Indeed, in two of the last four quarters (January-March 2012 and April-June 2012), Infosys reported a rare sequential fall in revenue. And in four of the past six quarters, Infosys missed the lower end of its own forecast. Revenue from its top five and top 10 customers has grown at below the company’s average growth rate for 13 of the past 18 quarters.
Experts said that if Infosys can sustain growth for another two quarters, it will mean that the worst is indeed behind it.
“It was somewhat of a relief to see that there was no ‘bad news’ from (currently) second ranked India-centric services firm Infosys,” Anthony Miller of UK-based research firm TechMarketView said in his note after the earnings announcement.
Infosys’s comeback quarter, the three months to December, has traditionally been a weak one for Indian IT firms because it has fewer working days and customers defer decisions to the following year.
Infosys surprised analysts with 4.1% sequential organic growth in dollar revenue, the currency in which it earns more than half of its business.
“Importantly, Infosys is maintaining a 3%-plus organic revenue growth guidance even for the March quarter which suggests that some momentum is coming back in the business. The India Post deal has no doubt contributed to the Dec-12 revenue growth,” CLSA analyst Nimish Joshi said in a note after Infosys announced its numbers.
For investors and analysts tracking India’s $70 billion software exports business, the Infosys earnings provide the first glimpse of what may be in store. TCS will report its third quarter earnings on Monday and Wipro Ltd on 18 January.
Industry lobby group Nasscom has projected that Indian IT firms will grow 11-14% in 2012-13, but Infosys had earlier said it expects to grow by just around 5% in the same period. Earlier this month, top executives of Infosys raised doubts about meeting even this target, citing delayed decision-making by outsourcing customers.
Given that, analysts expected Infosys to report a decline in net profit by as much as 6% and even lower its revenue growth forecast for the year ending March 2013, but they were proven wrong.
“These numbers make you ask if this is the comeback quarter that the Infosys management has been so desperately waiting for,” said an analyst at a multinational brokerage firm based in Mumbai who spoke on condition of anonymity.
Partha Iyengar, country manager (research) at Gartner India, also said the earnings could mark a turnaround for the company.
“Infosys results are finally coming closer to reflecting the demand reality, and if this sustains for the next two quarters, (it) could indicate that the worst phase of the company is behind it and it can stand to benefit from the strengthening demand environment,” he said. “The upping of full-year guidance is also a good sign for the company, which shows some semblance of a return to confidence for the company, which was quickly becoming a ‘negative outlier’ amongst the Indian services majors.”
On its part, Infosys has turned more aggressive over the past few months in terms of chasing new contracts, even if it meant absorbing the employees of a customer, such as the more than $100 million contract from Harley-Davidson.
Infosys 3.0 and beyond
According to Shibulal, the numbers also indicate that Infosys 3.0 is beginning to deliver. This strategy involves focusing more on high-end consulting and business transformation deals, against routine application and development deals that, while easier to close, are more manpower dependent and not as profitable as the former.
Infosys’s decision to go ahead with its new strategy coincided with a slowdown in the outsourcing business and because consulting and business transformation deals are more discretionary—customers can defer them if times are tough and they have to cut costs—the company hit a rough patch. Its stock has underperformed over the past six months and larger rival TCS and the US-based Cognizant are seen as the new sector flag-bearers.
“We have been executing on this strategy (Infosys 3.0) for a few quarters now; it takes a couple of quarters. This is an early sign of success in executing our strategy,” said Shibulal.
Still, it’s not as if the company is entirely out of the woods.
“There are pricing pressures, and if the environment doesn’t get better, the deals we have signed may not ramp up. In fact, even now we are seeing some clients ramp down projects,” Shibulal added.
Indeed, American Express Co., which outsources projects worth nearly $1 billion a year to India, has stopped giving fresh work to its software vendors in the country, depriving them of millions of dollars in revenue in the December quarter.
The US credit card firm halted projects from 21 November, asking TCS, Infosys, Cognizant and Syntel Inc. to wait till 31 December for clarity, said executives at the software exporters. The firms have so far lost six weeks of billed work.
For Infosys to achieve 5% revenue growth during year ending March 2013, it needs to grow its January-March revenue by at least 3.6%.
“We still have some growth to catch up, and we expect customers to finalize their budgets by February that could be marginally down to flat,” said Shibulal.
Analysts also fear that Infosys may be giving up on routine “bread and butter” outsourcing business to push for its 3.0 offerings that are more futuristic, but for now the company seems to have proven some analysts wrong by managing to report better earnings.
“We were able to maintain our margins through efficiency improvements despite increased operating expenses,” said CFO Bansal.