BackInfosys has suspended guidance; it speaks volumes on covid-19 impact
No guidance by Infy shows uncertainty is high; premature for investors to breathe a sigh of reliefInfosys ended the year with a slightly better exit rate than TCS, as growth rates have been higher
PremiumAs long as we can remember, Infosys Ltd has provided guidance either on annual revenue or revenue growth in constant currency terms. It has suspended this practice temporarily citing uncertainty over the impact of covid-19 and the related lockdowns across the world.
This is quite the opposite of what Tata Consultancy Services Ltd (TCS) did late last week. While TCS has never provided guidance, its post-results commentary suggested revenue will decline sharply in the June quarter in a range similar to that during the global financial crisis. It added that its internal models assume a recovery in the second half of the year, with revenue and profitability being flat year-on-year by the March 2021 quarter. Investors were enthused about this clarity of vision, and TCS shares have rallied 6% since its results announcement.
But as one industry analyst points out, “No guidance is the best guidance in these times. There is no way to know how things will play out." Indeed, many large global corporations have withdrawn guidance, citing the lack of clarity owing to the ongoing lockdowns and continued spread of the virus.
Salil Parekh, chief executive and managing director of Infosys, said in his post-results commentary, “Obviously, there will be an impact in Q1, but we have to see how things pan out, especially on the medical side— whether or not there will be a second wave of infections..."
Parekh added: “There is no clear view. There will be some sort of recessionary environment, although we don’t know the duration of how long it will last."
In short, things are really uncertain for Indian IT firms, and it is clearly premature for investors to breathe a sigh of relief.
Coming to Q4 results, the impact on revenue was greater than what the Street had anticipated. While analysts were expecting sequential growth of about 0.6%, the company reported a decline in revenue of 0.8% in constant currency terms.
On a year-on-year basis, Infosys’s growth of 6.4% in constant currency was ahead of TCS’s 3% growth by quite a margin. It also ends up with a better so-called exit rate of revenue.
“Infosys reported a 1.4% sequential drop in dollar revenues (-0.8% QoQ in constant currency). The exit revenue run-rate now implies flattish revenues for FY21 when annualized (exit revenue run-rate for TCS implies a 1.2% decline)," said Investec Capital Services (India) Pvt. Ltd in a note.
Nevertheless, the near-term impact on earnings is expected to be huge. The sudden slowdown in volumes will impact its employee utilization rates and profitability. The company has also received requests for payment deferments and price discounts, which will also hurt margins.
Of course, no one knows how bad the hit can be. Investors, left groping in the dark, have reason to worry about valuations of Indian IT stocks.
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