Infosys struggles for momentum as results beat expectations

For the March quarter, Infosys posted a net profit of $487 million, compared with $444 million in the year-ago period

For the financial year ending March 2015, Infosys forecast revenue growth of 7-9%. Analysts on an average had been expecting a guidance of around 6-8%. Photo: Bloomberg
For the financial year ending March 2015, Infosys forecast revenue growth of 7-9%. Analysts on an average had been expecting a guidance of around 6-8%. Photo: Bloomberg

Infosys Ltd, India’s second largest software services exporter, on Tuesday forecast a higher-than-expected increase of 7-9% in dollar revenue for the year to next 31 March, but warned that it still faces headwinds in the US and European markets as clients tighten technology budgets.

The Bangalore-based company’s forecast was ahead of the Street’s expectations of 6-8%, although it was still lower than the average industry growth rate of 13-15% predicted by lobby group Nasscom for the year.

In the last fiscal year, Infosys just managed to meet the lower end of its forecast of 11.5-12% increase in revenue. It posted full-year revenue of $8.25 billion, earning a net profit of $1.75 billion.

In the quarter just gone by, Infosys posted a net profit of $487 million, a 9.7% increase from a year earlier. Revenue rose 7.9% to $2.09 billion. Analysts had been expecting a net profit of $464 million on revenue of $2.1 billion, according to a Bloomberg poll. In rupee terms, Infosys posted a quarterly profit of Rs.2,992 crore on revenue of Rs.12,875 crore.

Chief executive officer S.D. Shibulal said the company still faces client-specific issues, especially with customer budgets around discretionary spending, as a number of clients wrestle with economic challenges in their home markets and seek to cut costs.

“The challenges that we face are growth-related and they are somewhat company-specific because our portfolio defines us. We have a bunch of clients and some of those clients are going through turbulent times,” said Shibulal. “The portfolio that we carry is quite different from others because our dependency on discretionary spending is almost double.”

Infosys said it would pay out a final dividend of Rs.43 per share.

The company’s shares, which rose by 3.6% initially on Tuesday, pared those early gains to close up just 0.76% at Rs.3,260.45 on a day the BSE’s benchmark Sensex fell 0.64% to 22,484.93 points.

Company president B.G. Srinivas said the negative momentum of the last two quarters would be reflected in its performance this financial year.

“What we’re seeing with clients is that there is no big upward momentum swing with their revenues,” Srinivas said in an interview. “In that scenario, clients are challenged for profitability and there are some significant cost take-out initiatives that are taking place. In that context, their budget is under pressure... and as part of that, discretionary spending budgets are under a higher amount of pressure.”

Discretionary spending refers to spending on consulting and systems integration as well as newer areas of technology such as analytics and cloud computing.

Infosys has a higher exposure to discretionary spending than the rest of the industry.

“While the demand environment is clearly challenging, best regional cadence is from Europe while digital is showing secular demand. Retail—perhaps due to security disruptions—is underperforming,” said James E. Friedman, an information technology services analyst at Susquehanna Financial Group Llp.

Fourth-quarter revenue declined sequentially by 0.4% as growth in North America, Infosys’s largest market, slowed, especially in the retail and hi-tech sectors.

Volumes were up 0.4% during the March quarter, driven mainly by offshore growth of 1.2%. The company’s attrition rate—the shrinkage in workforce— jumped to 18.7% from 18.1% in the December quarter.

In the quarter, Infosys benefited from four large deals, amounting to a total contract value of $700 million. Infosys also said it saw sustained momentum from its products, platforms and solutions business, signing 20 new deals in the area of cloud computing and Big Data, and 15 deals in the mobility space.

Operating margins improved by 50 basis points to 25.5% during the quarter, a clear reflection of the massive cost optimization drive being undertaken by chairman and founder N.R. Narayana Murthy.

One basis point is 0.01 percentage point.

“Infosys had managed down expectations just enough to reserve some upside,” said Friedman. “Although the year is a bit backended, the company’s initiative to add 200 salespeople suggests growth acceleration in the second half is logical.”

Infosys, which is in the midst of the biggest top-level management overhaul in its history, had signalled a weak fourth quarter in March, citing rampdowns and project cancellations at client sites, and said it expected revenue growth for the 2013-14 fiscal year to come in at the lower end of its full-year growth forecast.

Before Murthy’s return from retirement to Infosys in June last year, the company had been dogged by a string of disappointing results under the watch of Shibulal.

In fiscal years 2011-13, Infosys lost its pole position to faster-growing rivals Tata Consultancy Services Ltd and Cognizant Technology Solutions Corp., and missed its own predictions several times.

In those two years, its revenue growth rate fell from 26% in 2010-12 to a little over 5% in 2012-13, even as its costs linked to doing business at client locations went up from 36% to 46% of total costs.

Since Murthy’s return, at least nine top-level executives, including potential successors to current chief executive Shibulal, such as Ashok Vemuri and V. Balakrishnan, have left the company.

On Friday, Infosys said co-founder Shibulal, who was expected to retire in March 2015, had asked for early retirement by January next year or possibly even earlier.

Infosys has hired executive search firms Egon Zehnder and Development Dimensions International to prepare a list of candidates.

Among internal candidates, either of the two presidents, Srinivas or U.B. Pravin Rao, could potentially take over as CEO.

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