Infosys: turnaround or sentiment management?
4 min read 13 Jan 2013, 11:42 PM ISTQ3 earnings surprised analysts, who were presented a gloomy picture by the firm in a December meet
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Infosys Ltd’s earnings show on Friday that surprised analysts and gave the stock its highest single-day gain has raised questions on whether the firm was deliberately gloomy in a meeting with brokerages a month ago.
Analysts and experts tracking Infosys had based their expectations for the December quarter on the negative outlook of the firm’s top management in an interaction in the first week of December.
Analysts at foreign brokerages Barclays Capital, Nomura International (Hong Kong) Ltd and UBS Securities Asia Ltd cited statements by Infosys’s chief financial officer (CFO) Rajiv Bansal and chief executive S.D. Shibulal that the firm’s revenue target for the year ending 31 March might be at risk.
“We believe much of Friday’s move was driven by low expectations and short covering," analysts at Baird Equity Research said in a note on 11 January on Infosys, India’s second biggest software exporter.
Another analyst at a Mumbai brokerage said the tone of Infosys’s commentary in December did not even remotely suggest the third-quarter earnings could be better by any measure. “What could really change from December first week to late month? And remember that December already has fewer working days because of holidays," he said, requesting anonymity.
“The key question to answer is whether this quarter marks a turnaround in its performance or is it a case of well-managed expectations?" Sandeep Muthangi of IIFL Institutional Equities asked in his note after Infosys’s earnings announcement.
Analyst Diviya Nagarajan of UBS Securities had quoted Shibulal in her 6 December report that Infosys’s 5% revenue growth target for 2012-13 was under threat. “He noted that the dollar revenue guidance of 5% in FY13 could be under threat due to customer deferrals, rampdowns in a few large projects, delays in large deal closures, and longer-than-expected client shutdowns due to Hurricane Sandy, especially in the manufacturing sector," Nagarajan quoted Shibulal as saying in her report.
Nagarajan could not be reached for comments post the announcement.
Some corporate governance experts said Infosys may have crossed the line by “misguiding investors". “It’s not a very acceptable behaviour if they have toned it down," said a corporate governance expert who has worked in the treasury and investor relations departments at one of the top three Indian software exporters. “It looks like the new CFO was under some pressure," he added, requesting anonymity.
Infosys denied any attempt to tone down investor expectations or making selective disclosures on revenue forecast.
“So what is selective disclosure? Now when you reached out for this call and I am telling you we are seeing challenges, you can put a story tomorrow saying Infosys sees challenges, and that can be termed selective disclosure by people," Bansal said in a phone interview on Sunday. “I never said we were revising the guidance. We did not give anything specific about numbers. We just discussed the challenges."
He added that the discussions with analysts focused on the second half of fiscal 2013 and not the third quarter, making sure there was no specific forecast close to the earnings announcement. “We were about one-and-a-half months away from earnings. And we had assumed high growth for the third quarter; our internal number for Q3 was 4.5% revenue growth," Bansal added.
The problem was not really about Infosys breaching any established corporate governance norms, but more about holding the high standards the company has been known for, the corporate governance expert quoted earlier said.
“If you consider the fair disclosure policy of nods and winks, a lot of emphasis is put on body language and the way the management interacts with analysts," this expert said.
Bansal said Infosys’s management always flagged what it saw in terms of demand environment, which has still not changed much since earlier.
“Our India, Finacle (banking software product) and BPO (business process outsourcing) had a bad second quarter. And in the third quarter, all of them did very well sequentially. There was lot of hardware and software involved in these deals," said Bansal. “The fact is that we never gave a quarterly guidance."
Infosys should be careful about holding selective discussions, said another corporate governance expert who teaches at one of the Indian Institutes of Management.
“They must be asked—it’s not just about giving a specific number that can be considered forecast or disclosure. When the management flags caution, raises alarm bells followed by body language and tone of conversation, it’s as good as guidance," he said, requesting anonymity because he has been involved in an assignment with Infosys earlier.
A finance executive at a large Indian technology firm said the gloomy commentary by Infosys’s management leading up to the third-quarter earnings announcement could not be termed wrongdoing unless some senior company officials sold large chunks of shares within the next few days.
Kumar, who has been holding several hundreds of Infosys shares for the past decade, said for long-term investors, sharp stock movements do not matter much. He requested his second name be kept undisclosed since his company does not authorize media interviews. “This may be misleading and tough for a day trader, but not for long-term retail investors, pension funds and insurance companies," he said.
Bansal maintained that the December conversation did not project anything about the third quarter. “We spoke about half year and not quarterly guidance. The commentary was not about the third quarter, but the second half," he said.
