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Infosys revenue growth target seen under threat

Remarks by officials on decision-making delays by clients hurting demand indicate FY13 goals at risk, say analysts
Pankaj Mishra Mail MeTwitter
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First Published: Fri, Dec 07 2012. 11 59 AM IST
A file photo of Infosys campus in Bangalore. On its part, the tech firm is pushing aggressively to win fresh business, even if it comes at a lower profit margin—a big departure from the past. Photo: Mint
A file photo of Infosys campus in Bangalore. On its part, the tech firm is pushing aggressively to win fresh business, even if it comes at a lower profit margin—a big departure from the past. Photo: Mint
Updated: Fri, Dec 07 2012. 11 39 PM IST
Bangalore: Top executives of Infosys Ltd, India’s second largest technology services provider, have raised doubts about meeting the company’s revenue growth target of 5% for the current fiscal on delayed decision-making by outsourcing customers that could potentially crimp demand for the country’s $70 billion of software exports.
Analysts at multinational brokerage firms including Barclays Capital Inc., Nomura International (Hong Kong) Ltd and UBS Securities Asia Ltd cited commentaries by Infosys chief financial officer Rajiv Bansal and chief executive officer (CEO) S.D. Shibulal that the target for the year ending next 31 March may be at risk.
As India’s leading tech firms Tata Consultancy Services Ltd (TCS), Infosys and Wipro Ltd start negotiating fresh outsourcing contracts with customers such as Citigroup Inc. and American Express Co., they are facing delays in decision making by overseas clients because of economic uncertainties in the US and Europe.
But TCS and Cognizant Technology Solutions Corp., the US-based firm with most of its employees in India, do not seem to be share Infosys’ view of slowing demand for services.
In their report, Infosys: Near term challenges persist, released on Friday morning, Barclays analysts Bhuvnesh Singh and Vaibhav Dhasmana cut their revenue growth forecast for Bangalore-based Infosys for the year ending March to 3.8% from 5%.
“We are surprised at the negative commentary from Infosys especially considering our recent positive conversation with TCS,” the Barclays analysts wrote.
Infosys has traditionally set the tone and tenor of analyst commentary on prospects for the software services sector by reporting its earnings ahead of rivals and providing both annual and quarterly revenue forecasts. The company’s reputation as the industry bellwether has faded in recent quarters, and in July it abandoned the practice of providing quarterly forecasts, citing ambiguities in demand.
Infosys’s revenue growth forecast is less than half the 11-14% annual growth in exports from India predicted by the National Association for Software and Service Companies (Nasscom), the industry lobby, for the year to next March. TCS, Cognizant and HCL Technologies Ltd have indicated that they will beat Nasscom’s forecast.
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Indeed, in four of the past six quarters, Infosys missed the lower end of its own forecast. Infosys’s revenue from its top five and top 10 customers have grown at below the company’s average growth rate for 13 of the past 18 quarters.
Infosys shares closed marginally down by 0.80% at Rs.2,319.7 on BSE on Friday; the benchmark IT index was down by 0.98% and the exchange bellwether, the Sensex, fell 0.32% to 19,424.10 points.
“Earlier than expected furloughs at the client end have exacerbated the issue and could impede volume growth in the current quarter,” the Barclays analysts said.
Cognizant’s 5 December regulatory filing on compensation details of top executives indicated revenue growth of around 16% in 2013, slower than the 20% pace expected to be set this year.
For India’s $100 billion (nearly Rs.5.5 trillion) information technology (IT) industry—70% of whose revenue comes from exports—the suggestion of slower revenue growth from Cognizant could mean a challenging year ahead.
As of press time, an Infosys spokesperson hadn’t responded to an email query sent by Mint on Friday morning.
UBS analyst Diviya Nagarajan said in a 6 December report that Infosys CEO Shibulal raised concerns about meeting the fiscal 2013 growth target.
“He noted that the dollar revenue guidance of 5% in FY13 could be under threat due to customer deferrals, ramp downs in a few large projects, delays in large deal closures and longer than expected client shutdowns due to Hurricane Sandy (in the US), especially in the manufacturing sector,” Nagarajan said in her report.
She added that Infosys could see sequential revenue growth dip below 3%.
Infosys said in April it will boost revenue for fiscal 2013 by 8-10%, but lowered the forecast to 5% growth after the June quarter. The company also stopped providing quarterly revenue growth forecast from June citing macroeconomic uncertainties.
“Hurricane Sandy has had a two-day impact on the quarter for some projects in the US east coast. Problems seem most magnified in the BFSI (banking, financial services, insurance) sector (34% of revenue), with an increased level of uncertainty over the past few weeks,” the Barclays report said.
Nomura Equity Research analysts Ashwin Mehta and Pinku Pappan said the TCS management does not share Infosys’s pessimism on the demand ahead, especially from banking and financial services customers.
On its part, Infosys is pushing aggressively to win fresh business, even if it comes at a lower profit margin—a big departure from the past.
“In our meeting, Infosys admitted that it dropped the ball on the traditional business in the quest for differentiation with Indian peers. However, it also affirmed a more aggressive and flexible go-to market strategy going ahead,” CLSA analyst Nimish Joshi said.
To be sure, Shibulal—the last of the company’s founders to lead Infosys—wants his firm to chase newer business opportunities such as cloud computing and products, and reduce the proportion of commoditized software development and maintenance projects.
“The company remains committed to the Infosys 3.0 strategy of moving up the value chain and believes the strategy remains relevant, given the commoditization being seen across the bread and butter service lines,” the Nomura research analysts said.
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First Published: Fri, Dec 07 2012. 11 59 AM IST
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