New Delhi: Infosys Ltd, India’s second-largest software exporter, may cut its annual sales forecast as concern that proposed US immigration legislation could impose visa restrictions prompts clients to delay outsourcing contracts.
Infosys is expected to forecast sales in dollar terms will increase as much as 7.5% in the 12 months ending 31 March, from an earlier projection for as much as 10% growth, according to the median of 10 analysts in a Bloomberg News survey. The Bangalore-based company will report first-quarter earnings on Friday.
Billionaire co-founder N.R. Narayana Murthy, who returned as executive chairman last month to help revive growth, said 15 June that sales recovery may be painful and take at least 36 months. “The US Bill, if approved without revision, would make it harder for outsourcing companies to use temporary worker visas and will be damaging to the offshore business model,” according to Bloomberg Industries analyst Anurag Rana.
“Fiscal 2014 won’t be a great year for Infosys, with client sentiment toward the industry dimming,” said Urmil Shah, a Mumbai-based analyst at Kim Eng Securities Pvt. “The immigration bill is compounding problems and is really the biggest fear across the industry, but especially for Infosys which is already being surpassed by the competition.”
Among the various changes in the proposed immigration law that has been passed by the Senate is a measure to restrict companies with a US-based staff comprised of visa holders in excess of 15% from placing those employees at domestic client locations. This rule really just shuts you off from the entire business, Infosys’s chief financial officer Rajiv Bansal said at the Sanford C. Bernstein Strategic Decisions Conference on 31 May.
Infosys gets the bulk of its sales from US companies, with North American customers having accounted for 62.2% of revenue in the year ended March. Work done onsite at client locations worldwide accounted for 51% of revenue in the last fiscal year, with the remaining 49% delivered from offshore, according to data on the company’s website.
Shares of Infosys plunged the most in 10 years in Mumbai trading on 12 April after the company forecast full-year sales growth as slow as half the pace analysts estimated. The stock has slumped 14% since the software-services provider’s revenue projection missed the 12.7% pace, based on the average of analysts’ estimates, while the benchmark S&P BSE Sensex has climbed 4.1%.
Tata Consultancy Services Ltd, India’s largest software exporter, is projected to post full-year revenue growth of 16%, the average of 64 estimates compiled by Bloomberg. Infosys’s April forecast of 6% to 10% increase in annual sales already lags behind the 10% to 14% growth estimate for Indian software exports given by the industry group Nasscom.
“The global economic slowdown has taken its toll on India’s largest software services companies, with third-ranked Wipro Ltd and Infosys being the slowest to emerge after 2008,” said Harit Shah, analyst with Nirmal Bang Equities Ltd. Revenue growth over the last four fiscal years averaged 10% at Wipro, and 17% at Infosys, lagging behind Tata Consultancy’s 23% and HCL Technologies Ltd’s 29%, according to data compiled by Bloomberg.
While the rupee has slid to a record low, increasing the value of sales made outside India, Infosys and Tata Consultancy are passing on the currency benefit to clients as they compete for orders.
The rupee fell 0.8% to 59.655 per dollar on Wednesday in Mumbai, extending this year’s loss to 7.8%, according to prices from local banks compiled by Bloomberg.
“The projected 7.5% sales growth for the current 12 months will be Infosys’s slowest in four years and the lowest among the four competitors,” according to data compiled by Bloomberg.
“Infosys has been forced to shed its premium pricing in order to compete for global contracts,” Kim Eng’s Shah said. This has resulted in narrower operating margins, which could reach as low as 23% in the quarter ended June, he said.
“We are very focused on growth and that is the reason we actually did not give our margin guidance for the full-year,” Infosys’s Bansal said at the conference in May. “So I think short term, focus on growth, even if it means probably going more aggressive on the pricing.”
Infosys will refocus on winning large outsourcing deals and adopt flexible pricing, Murthy told shareholders 15 June. The software maker, which aims to narrow Tata Consultancy’s lead, last month announced salary increases of an average 8 percent for employees based in India from 1 July and a similar 8% average raise for its global sales force effective 1 May.
There is a clear focus on addressing internal issues following the return of Murthy, Sandip Agarwal, Omkar Hadkar and Deepansu Jain, analysts at Mumbai-based Edelweiss Securities Ltd., wrote in a 13 June note to investors. This announcement will have a positive impact on employee morale.
Infosys’s push to tap demand from US President Barack Obama’s drive to overhaul the nation’s health-care system also helped it win at least one order in the last quarter. The software company’s public services unit last month won a one- year $49.5 million contract from the District of Columbia to develop a health benefit exchange.
The software exporter is projected to report net income in the three months ended June increased 1.3% to Rs.2,320 crore ($390 million), according to the median of 34 analysts estimates compiled by Bloomberg. Sales in the quarter climbed 14% to Rs.10,990 crore, analysts estimated.
“Expectations are low for Infosys, because Murthy has basically told us not to expect a good result for six or seven quarters,” said Amar Mourya, an analyst with India Nivesh Securities in Mumbai.
Murthy at the helm is providing a bit of comfort, so we’re not expecting any significant carnage going forward. Investors with long-term patience will be rewarded when the company recovers, said Mourya, who recommends investors hold the stock.