When Infosys Technologies Ltd announced its results for the September quarter, it was for the first time that it lowered the growth target it sets at the beginning of a fiscal year. The lowering of guidance was for two reasons—sharp cross-currency movements and the economic slowdown around the globe.
These two factors continued to affect information technology, or IT, companies in the December quarter, and are expected to resonate in Infosys’ results commentary this time around as well. But while the annual target is expected to be lowered again, the markets would be rather disappointed if one of the reasons given is the slowdown.
It would be fine if cross-currency movements are the only reason, but if the slowdown is responsible for lowering guidance for two successive quarters, it would be worrisome.
Infosys normally keeps a buffer while giving its guidance to ensure that it meets its target even if some factors go against it. This buffer was breached and it had to lower its guidance last quarter. But the lowered guidance, too, would include a buffer which, if breached again in just three months, would send the signal that things are deteriorating at a rapid pace.
The third-quarter results also help in providing some foresight about the outlook for the next fiscal year. Analysts use the company’s estimates for the March quarter as a base on which they build their own estimates for the next fiscal year.
The company’s commentary on issues such as pricing, renegotiations with customers, order booking and staff additions would also be keenly watched.
IT valuations have corrected sharply in the past few months and most stocks trade at single-digit price-earnings multiples. Infosys trades at around 13 times trailing 12-month earnings, near its record lows in terms of valuations. But if the prognosis after the company’s December quarter results is that the outlook for IT companies is as bleak as ever and that earnings may decline significantly in the next fiscal year, even these seemingly low valuations may come under threat.
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