Infosys again lowers revenue growth target

Infosys cuts annual growth forecast to at-best 9.2%, even as it beat estimates to report a 3.5% rise in Q2 revenue over the last quarter


CEO Vishal Sikka said Infosys was scaling back its growth target because it had performed poorly in the first quarter and on account of near-term uncertainties. Photo: Hemant Mishra/Mint
CEO Vishal Sikka said Infosys was scaling back its growth target because it had performed poorly in the first quarter and on account of near-term uncertainties. Photo: Hemant Mishra/Mint

Bengaluru: Infosys Ltd beat analysts’ quarterly earnings estimates but expects to grow at best at 9.2% in the year ending 31 March—a first in the history of India’s offshoring industry when the nation’s top three software companies expect annual growth to be in single digits.

Infosys cut its full-year dollar revenue forecast for the second time this fiscal, and now expects to grow between 8.2 and 9.2%, and 8-9% in constant currency terms.

“The sharp cut in FY17 USD revenue growth guidance, despite the recovery in growth momentum in 2QFY17, reflects a shift to a conservative approach on guidance after two successive cuts on the aggressive stance adopted at FY17-start,” Pankaj Kapoor, director of India IT services and software equity research at JM Financial Institutional Securities Ltd, wrote in a note.

Chief executive officer Vishal Sikka said Infosys was scaling back its growth target because it had performed poorly in the first quarter and on account of near-term uncertainties.

Nasdaq-listed Cognizant Technology Solutions Corp., which has most of its employees in India, has also cut its revenue growth forecast twice and expects to grow at 8.5-9.5% in 2016. Cognizant follows the calendar year.

Tata Consultancy Services Ltd (TCS), India’s largest software services firm, does not give forecasts, but after it reported a poor 0.3% sequential dollar revenue growth on Thursday, it will be a tall task for the company to better the growth rate of 7.1% reported last fiscal year.

Worryingly for both Infosys and TCS, it is not just sluggish revenue growth which is of concern. Both firms sounded less confident of maintaining profitability, with Infosys conceding that operating margin may be below its stated range of 25-26%.

Infosys’s sharp downward revision from the first growth outlook of between 11.8% and 13.8% dollar revenue expansion in April means that Infosys has shaved off $440 million in business from its first projection of adding $1.31 billion in incremental revenue this year. For Infosys, an at-best 9.2% growth means it expects to do $870 million in new business this year compared to $790 million last year.

Infosys Ltd shares ended the day 2.53% lower at Rs1,025.70 on NSE even as the Nifty index rose 0.12% to 8,583.40 points.

ALSO READ | Is Infosys being overly conservative with its guidance?

Infosys said on Friday that revenue for the three months ended 30 September improved 3.5% to $2.58 billion from $2.5 billion in the preceding quarter. This was on account of the company partially recording $20 million in business from the Goods Services and Tax Network project, and a 4.5% growth in business from clients in banking and financial services segment.

In constant currency terms, revenue grew 3.9% sequentially. Net profit rose 5.5% to $539 million from $511 million in the April-June period as the company deployed fewer people at expensive overseas client sites.

A Bloomberg survey of analysts expected Infosys to report revenue of $2.58 billion and profit of $529.81 million in the September quarter.

Operating margin expanded 80 basis points to 24.9% at the end of the September quarter, compared with 24.1% at the end of June.

There are a couple of heartening takeaways in Infosys’s performance during the second quarter, say analysts. First, a 4.6% sequential increase in business from banking clients suggests that Infosys may be winning customers at the expense of other large technology vendors.

Second, Infosys reported over $1.2 billion in large deal wins during this quarter. This means that in little less than 18 months, Infosys has managed to increase its large deal wins from a little over $400 million a quarter to $1.2 billion.

Analysts at Citibank said in a note after Infosys declared its earnings that “fairly all-round growth in key geographies and verticals—better than what peer TCS reported” is another positive for the company.

The US business, which brings 61.5% of Infosys’s revenue, improved 2.6% sequentially, while business from India, which accounts for 3.4% of overall revenue, jumped 29.1%.

The company added 78 new clients in the second quarter, taking the total number of customers to 1,136. Its attrition rate dropped marginally to 15.7% at the end of September, as against 15.8% during the June quarter.

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