Mumbai: Infosys Ltd said last Monday that it will carry out a ramp-down of a project with The Royal Bank of Scotland subsidiary, Williams and Glyn. The project involved 3,000 of its staff, most of whom were based offshore. This means it could have contributed about $80-90 million in annual revenues, according to an analyst at a multi-national brokerage.
This is about an 80 basis points impact on annual revenues, although the impact in fiscal 2017 will be less, since the company said the ramp-down will be done in an orderly fashion.
But this is another blow for Infosys investors, after the June quarter results shocker, when the company brought down its revenue guidance by a significant margin. After this incremental negative news, and given the environment the industry is in currently, even the restated guidance of 10.5-12% revenue growth in fiscal 2017 looks ambitious. After all, Infosys needs to grow revenues at a compounded quarterly average growth rate of 3% in each of the next three quarters to achieve double-digit growth. In fiscal 2016, which turned out to be a great year for the company, revenues had grown at an average rate of 3.5% in the September, December and March quarters.
And note that demand for IT services has slowed considerably this year. One of the key takeaways from the June quarter results was that the typical acceleration in revenues seen during this time of the year was absent from the important US market. And while commentary on the banking and financial services industry was mixed till about three months ago, now nearly all companies agree that demand for IT services from that sector will be soft.
Analysts at Nomura Research said in an 11 August note to clients, “(The June quarter) results suggest a higher than anticipated deceleration in growth and continued risk to margins."
Of course, there are some bright spots, such as demand for infrastructure management services, the European market, and the healthcare and retail industry verticals. But these are clearly not enough to support double-digit growth of the multi-billion dollar IT services companies.
It now looks like Infosys will join Tata Consultancy Services Ltd, Cognizant Technology Services Corp. and others in reporting high single-digit growth rate for the current fiscal. The only silver lining is that this seems to be captured in the company’s shares, which have fallen about 12% since mid-July.
The writer does not own shares in the above-mentioned companies.