The country’s second biggest software services provider, Infosys Technologies Ltd has an impeccable record of never missing its dollar-denominated guidance targets. It did miss the yearly guidance for the fiscal year to March in rupee terms, but that was because of the sharp rise of the rupee last year. What is more important is the dollar target, which the company has met even in the most challenging times.
In fiscal 2002, when the US economy last went into recession, the company reported revenues of $545 million (Rs2,612 crore then), exactly in line with the higher end of the guidance target set at the beginning of the fiscal year. In that year, annual revenue growth rates had fallen from a high of 63% in the first quarter to as low as 16% in the fourth.
See: Could this year be very different from FY02? (PDF)
Since that difficult year, Infosys has beaten its annual dollar-based guidance by an average of 10%, with the highest (15.3%) outperformance in 2001-03 and the lowest (3.9%) last fiscal year. This has earned Infosys a reputation that its guidance targets are conservative and analysts’ estimates are always higher than the company’s target. This, coupled with the fact that the company met its target even in the challenging times during 2001-02, has almost made the company’s guidance sacrosanct.
But that is now changing. The head of research at one of India’s largest brokerages, who did not want to be identified, said, “Till the beginning of this financial year, I would have attached zero probability of Infosys missing its revenue guidance. The probability has now risen.” The consensus view on the street, he added, is still that the company would meet its guidance, although hardly anyone is expecting any meaningful outperformance as in the past six years.
Yet, one mutual fund manager, when asked about the possibility of Infosys missing its guidance, pointed to an interesting statistic. In order to meet the higher end of its dollar-based revenue target for the year, Infosys has to garner incremental revenues of $70 million, $72 million and $76 million, respectively, in the remaining three quarters of this year.
Infosys reported revenues of $1,155 million in the June quarter, and has set a target of $1,215-1,225 million for the September quarter. At the higher end of that target, it needs to generate additional revenues worth $70 million from its existing base.
It doesn’t seem like much for a company that is expected to report $5 billion in revenues this year. But the fund manager pointed out that in the company’s history, it has managed incremental revenues of more than $70 million only on three occasions in the past—in the second and third quarters of 2006-07 and in the second quarter of last fiscal.
On these occasions, Infosys had got unusually high business from a few of its top clients, especially in banking, financial services and insurance, as well as in retail.
Analysts tracking these sectors note that each of these quarters was outstanding in terms of volume growth and was also a period when the company enjoyed billing rate increases.
Infosys now operates at a much higher base than it did in those quarters, and this should work in the company’s favour. But given the current slack state information technology (IT) spending is in worldwide—and there is no question of an increase in average billing rates—it seems a tall order for the company to repeat what it did in those previous so-called “outstanding quarters”. What’s more, it needs to do it for three straight quarters to achieve its annual guidance.
About a month ago, Infosys reiterated the guidance it had given in April. But the IT environment has turned negative in recent weeks.
Two weeks ago, Cognizant Technologies Ltd, among the Top 5 IT services players based in India, said its conversations with customers indicated the effects of a slowing economy will impact industry groups other than financial services and health care in the September and December quarters. Indian IT players had earlier said the slowdown had impacted only financial services and retail. The head of research said that no industry or geography can be termed a safe haven in the current environment.
Meanwhile, there is talk in the market that JPMorgan Chase and Co. has cut billing rates for its IT outsourcing contracts with a large India-based company. JPMorgan isn’t one of Infosys’ top clients, but with most banks going through difficulties, it won’t be surprising if there are further price cuts. Infosys had already mentioned it faced some cases of downward price renegotiations last quarter. It means that the entire increase in revenues would have to be volume-led.
JPMorgan made a regulatory filing earlier this week that it lost $1.5 billion on mortgage-related assets in the past six weeks alone, and that trading conditions for these securities had “substantially deteriorated” this quarter. There seems to be no end to the negative news emanating from the US. One bright spot is that oil prices have receded, and this should ease things for a number of Infosys’ clients.
But, on the whole, Infosys is faced with an environment that is nearly as challenging as 2001-02. As the chart shows, however, Infosys’ prognosis of how much incremental revenues it can garner is quite different this time around.
According to the company, the practice of outsourcing to Indian vendors is much more widespread now than it was in that year. Besides, its reliance on the US has come down since; but then, even Europe is on the brink of a recession. All said, the probability of Infosys missing its guidance for the first time, even if it is only by a bit, seems high.
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