Bangalore: In a move that could indicate a significant slowing of business for Indian IT firms, Infosys Technologies Ltd may declare revenue lower than previously estimated for the three months ended 30 September on account of the dollar’s rise and a slowdown in the US.
While the company itself would appear to have been laying the ground for this over the past few weeks with talk of a difficult economic environment in the US, the biggest market for Indian IT firms, and an increasing focus on the domestic market, things came to a head Thursday night when securities firm CLSA released a report that said Infosys was likely to miss its dollar guidance for the second quarter as well as for the entire year.
Dollar Doldrums (Graphic)
The company’s chief financial officer V. Balakrishnanadmitted that the dollar’s appreciation could hurt the company. “It is too early to speculate on the guidance now. (However), there could be impact on the reported dollar numbers because of the sharp cross-currency movements.” The dollar has appreciated against currencies such as the British pound, the euro and the Australian dollar in which Infosys bills around 28% of its revenue.
The CLSA report sent shares of Infosys and other IT firms plunging. Shares of Infosys fell 6% to close at Rs1,644.10 each on the Bombay Stock Exchange on Friday, on a day when the exchange’s benchmark Sensex index fell 2.3% to 14,000.81. The exchange’s IT index fell 4.6% to 3,806.74.
Govind Agarwal, an analyst at UBS, said the “sharp and sudden” appreciation of the US dollar against the pound and the euro would hit the revenue of Indian IT firms, in dollar terms, by one, or two percentage points. In a report, he said the US dollar had risen 5.5%, 13.8%, and 13% respectively against the rupee, the pound and the euro in the current quarter.
Indian IT firms were hit by an appreciating local currency in 2007-08 because almost all (or much of their) billings are in other currencies. This year, they have been hit by a slowing of business in the US, an effect of the credit crisis-induced slowdown in that country. And they haven’t been helped by the dollar, which has appreciated not just against the rupee, but also against other major currencies.
In an interview with Mint on 1 September, Infosys chief executiveS. Gopalakrishnan had said there was “still a lot of uncertainty left” in the US and “bad news...is coming in everyday”.
S. Mahalingam, executive director and CFO of India’s largest IT services firm Tata Consultancy Services Ltd said that the environment is still “challenging”.
“The growth will be slower than last year. Nasscom (India’s software lobby group) has said there is slower growth 21-25%, at least 10% lower than last year, let us keep it at that. We will see (foreign exchange) losses (and) most of the companies will see the same.”
However, Wipro Ltd does not see currency volatility having an impact on its September quarter earnings, a senior official said on Friday. “We don’t rely on cross-currency volatility to drive our business,” Suresh Vaswani, the joint chief executive of Wipro’s IT business, told reporters.
On Thursday, H.R. Binod, vice-president of the unit Infosys set up this year to focus on India, said to The Wall Street Journal that the firm was sharpening its focus on the domestic market. Billing rates on domestic contracts are typically lower than those on overseas ones.
The statements by Gopala-krishnan and Binod could be one way in which Infosys is preparing investors for a relatively poor performance in the quarter ending September, although the firm is renowned in the stock market for “underpromising” and “overdelivering”. The last time Infosys had trouble meeting its revenue and profit estimates—it eventually did, but barely—was in early 2002. Every quarter since, the company has met, and often exceeded these estimates.
In its report, CLSA said that because of the “cross-currency headwind”, Infosys would have to revise downward its revenue growth guidance for the September quarter by two percentage points. Infosys had previously said that it would earn revenue of between $1.22 billion and $1.23 billion (Rs5,588-5,633 crore today) in the quarter, its second of fiscal year 2008-09.
Research firm Forrester Inc. said in a report released this week that 40% of large businesses across sectors have cut their IT budgets this year, including almost half of financial services companies, which are typically the biggest spenders on technology.
K. Raghu and Reuters contributed to this story.