The guidance provided by Infosys Technologies to investors on Wednesday is both disappointing as well as an indication that the current fiscal year promises to be a tough one for Indian companies.
India’s second largest technology services company and a stock market bellwether expects dollar revenues in 2009-10 to drop by between 3.1% and 6.7%. Infosys is heavily dependent on the recession-stricken US market for its revenues—and especially on the banking and financial sectors that have been hit by bankruptcies, mounting losses and job losses.
Illustration: Jayachandran / Mint
The Infosys guidance cannot directly be used to draw grim conclusions about the rest of the Indian corporate sector, since few companies are as dependent on exports as Infosys and its peers are. But most Indian firms are likely to face a tough 12 months from April, something that the stock market seems to have ignored in its current euphoric mood.
The year that has got over will undoubtedly lead to a string of poor and mediocre corporate report cards. Sales may stay in positive territory for the fourth quarter, but net profits are almost definitely going to decline, perhaps by as much as 25% if the oil refiners are not considered, though this will partly be due to the high base effect. But many expect the Indian economy and companies to then bounce back. There are many reasons to doubt this confident view.
One, the Indian economy is not likely to grow very fast this year; some global outfits such as the Organisation for Economic Co-operation and Development estimate that the Indian economy will grow at an insipid 4.3% this year. Two, firms have to come to terms with ground-level problems, including repaying debts run up in the boom years and providing for foreign exchange losses.
The micro indicators point to a deterioration in corporate financials—from the growing number of downgrades by credit rating agencies to the rise in the number of firms approaching their bankers to restructure debt under the corporate debt restructuring scheme.
The stock market seems to have turned its back on this harsh reality.
India will undoubtedly have a better year than most other economies and quarter-on-quarter growth will look up, but we find it hard to believe that national output and corporate profits are on the verge of a sharp rebound in the rest of 2009.
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