BackInfosys investors have a lot to worry about
Infosys investors have a lot to worry about
PremiumA file photo of Infosys CEO S. D. Shibulal.
Infosys Ltd’s results for the quarter ended March are shocking. It appears, prima facie, that investors are most upset about the modest 8-10% revenue growth guidance for the year till March 2013. This column (What will be Infosys’s forecast?) had pointed out two days ago that the lower end of the company’s guidance is likely to be in single digits, and that it could lead to a sharp drop in the company’s shares.
In the recently concluded March quarter, the company’s revenue fell short by 3% compared with the guidance it had issued in January. Adjusted for cross-currency movements, its revenue guidance for the March quarter stood between $1.819 billion and $1.823 billion. It reported revenue of $1.771 billion, or a shortfall of $48-52 million compared with what it had guided for. A $50 million miss is significant, and what makes it far worse is that the company had already reduced its March quarter guidance by 3-7% in January, compared with what it had guided last October.
This reduction, in fact, had led to an 8.4% drop in the company’s shares three months ago. In short, the company has missed already low expectations by a big margin. Chief financial officer V. Balakrishnan’s defence: “This is the new normal, where things can change by the day. Never before have we seen such high volatility in clients’ spending decisions." He added that March was an unusually difficult month, with clients delaying new project starts, being reluctant to sign new projects and in some cases even bringing down the level of work committed to the company.
Most analysts, who were expecting 1% revenue growth (on a sequential basis?) in the March quarter, have been left aghast. The investing community will now start viewing the company’s guidance estimates with increasing skepticism. The company has missed its guidance estimates in three of the last five quarters, as well as missing the FY12 guidance given at the beginning of the year.
And while it is tempting to conclude that the FY13 guidance of 8-10% revenue growth reflects Infosys’s usual conservatism, it is anything but cautious. These estimates assume an average quarterly growth rate of 4.3-4.8% in the September, December and March quarters of the current financial year. For a company that’s just reported a 2% decline in revenue and which expects 0-1% growth in the June quarter, expecting such a jump in growth rates is wishful thinking. Balakrishnan said that the confidence for the yearly guidance stems from the visibility on clients’ budgets, although there is increasingly less clarity on when they will actually spend these budgeted amounts.
Investors will do well not to take the 8-10% estimate as a conservative one, and assume that the company will easily beat it, if not meet it. Note that the company’s volumes have grown by only 11.1% in FY12 and by 10.3% in the March quarter. If, as the company said, volatility and uncertainty have increased dramatically, is it inconceivable that growth rates in FY13 will be far lower? Also note that Infosys has 95% visibility for its guided revenue at the beginning of each quarter. And it has 65% visibility for its guided revenue for the whole year. In other words, by its own admission, it’s easier to believe the quarterly guidance estimates than the annual guidance estimates.
Consider also that the company has missed even quarterly guidance estimates two quarters in a row. In this backdrop, it’s fair to ask the question: “Who in his/her right mind will believe the company’s annual guidance?" It’s little wonder that the Infosys management debated internally whether they should give any guidance at all for FY13.
Another worrying sign about the company’s guidance estimate is that it assumes a 70-80 basis points drop in margins in FY13, despite multiple tailwinds. For instance, this year, it hasn’t factored any wage hikes. A basis point is one-hundredth of a percentage point. Besides, its guidance assumes a dollar-rupee rate of 50.88, which represents a 5.6% depreciation compared with the average realized rate for FY12. In addition, employee utilization is low, giving the company ample leeway to curb hiring and increase margins.
Some analysts are also worried about the company’s obsession with profitability, which appears to be impacting volumes. In recent quarters, even Accenture Plc has been growing faster and competitor Cognizant Technology Solutions Corp. has guided for 23% growth in the year till December 2011.
Whichever way one looks at it, the Infosys results are a disaster. After the 12.7% correction in its shares, Infy now trades at 15 times estimated FY13 earnings. Needless to say, the stock will find takers because of its impressive cash flow generation and return ratios, but if ensuing quarters reaffirm the single-digit growth trend, there could well be a further correction.
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• Also Read | Infosys revenues, profit drop, FY13 guidance 8-10%
• Infosys to hire 35,000 in FY13
• Infosys plunges 13% on BSE; investors lose Rs20,000 crore
• Also See | How Infosys performed in the last 10 years ( PDF )
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