Infosys' slower revenue growth outlook hits shares

Written by Agencies | Bangalore | Updated: Apr 13 2012, 17:56pm hrs
Shares fall over 10%, cuts $3 bn from market cap; sees fiscal 2012/13 dollar revenue growth of 8-10%

India's software major Infosys Ltd disappointed investors on Friday with a lower-than-expected revenue growth outlook due to an uncertain global economy and currency volatility, sending its shares down to their lowest level in more than six months.

Mutual Funds Check for top funds

The forecast from India's No.2 software services exporter sparked worries about the prospects for the country's $100 billion outsourcing sector, which faces slowing demand from its western clients and intense competition from global rivals.

Stocks More on Infosys

Shares in Infosys, once seen as a sector trend-setter, were trading 8.9 percent down at 2,505 rupees at 0642 GMT, after having fallen as much as 10.9 percent. The fall wiped off $3 billion from the company's market value. The main market was up 0.3 percent.

The company said it expects its dollar revenues to grow 8-10 percent for the year ending March 2013 to $7.55 billion-$7.69 billion, lower than expectations of 10 percent to 15 percent forecast by most analysts.

Clearly, there is no immediate recovery in sight for the industry with expectations that the environment will continue to remain challenging, said Dhiraj Sachdev, senior fund manager at HSBC Asset Management in Mumbai.

However, there is one thing we need to keep in mind. This is the first quarter when the budgets are just prepared and in the planning stage so we will get more clarity on how the year will go when we are a few months into it.

Reflecting concerns about the Indian outsourcing sector's growth, the information technology market index fell 6 percent, while sector leader Tata Consultancy Services was down 4 percent and Wipro dropped 3 percent.

Company INFO More on Infosys

Bangalore-based Infosys said consolidated net profit for the fiscal fourth quarter ended March 31 rose 27.4 percent to 23.16 billion rupees ($449 million) from 18.18 billion rupees a year earlier.

Analysts had forecast a net profit of 23.18 billion rupees for the company, whose customers include Procter & Gamble Co and Volkswagen AG, according to Thomson Reuters data.

We will have to wait for Tata Consultancy and Wipro results to see if this is more to do with the macro economic situation or there is some company specific issue, said Shradha Agrawal, analyst at Batlivala & Karani, referring to Infosys. The Infosys stock has room for more correction.

CHALLENGING YEAR

Infosys, Tata Consultancy Services, and No.3 exporter Wipro , part of the country's showpiece and export-driven outsourcing sector, have benefited from cost-conscious overseas customers bumping up demand.

But an uncertain global economy, eurozone sovereign debt concerns and rising U.S. rhetoric against the outsourcing of jobs to low-cost locations ahead of the November presidential election have triggered worries about a decline in outsourcing demand.

The Indian outsourcing industry gets about three-quarters of its revenue from the United States and Europe.

The year ahead looks challenging for the IT services industry, with slow recovery in the global markets, said S.D. Shibulal, chief executive officer of Infosys.

Infosys has seen order ramp downs, or cutbacks on spending from various clients, especially those in the financial services sector, he added.

Tata Consultancy, Infosys, and Wipro are also facing increased competition for a bigger share of the outsourcing business from global rivals like IBM and Accenture .

Worldwide IT spending is forecast to increase 2.5 percent in 2012 from a year ago, research firm Gartner said on April 5, lower than its January forecast of 3.7 percent growth. The forecast cut is due to a strong U.S. dollar, it said.

MARGINS SEEN DOWN

Infosys expects its earnings per American depositary share to be in the range of $3.12 to $3.17 in the fiscal year ending in March 2013, a growth of 4 percent to 5.7 percent from a year ago.

Its revenue rose 22.1 percent to 88.52 billion rupees in the March quarter as it added 52 new clients.

The company expects operating margin in the quarter to end-June to be 200 basis points lower than in the quarter to end-March due to hiring charges and visa-related costs, its chief financial officer, V. Balakrishnan, told reporters.

Nasdaq-listed Infosys plans to add 35,000 staff in the year to March 2013 to its current headcount of 149,994, he said.

The company, which has shied away from large acquisitions despite sitting on a huge cash pile, said its cash balance was $4.1 billion at the end of March.

($1=51.6 rupees) (Writing by Sumeet Chatterjee; Editing by Matt Driskill)

COMMENTARY:

DHIRAJ SACHDEV, SENIOR FUND MANAGER, HSBC ASSET MANAGEMENT, MUMBAI

The numbers are disappointing and definitely lower than expectations. Clearly there is no immediate recovery in sight for the industry with expectations that the environment will continue to remain challenging.

However, there is one thing we need to keep in mind this is the first quarter when the budgets are just prepared and in the planning stage so we will get more clarity on how the year will go when we are a few months into it.

Also with the bellwether taking a cautious stance the year will continue to remain a challenge for the industry.

ABHISHEK SHINDAKAR, ANALYST, ICICI SECURITIES, MUMBAI

The guidance is very low with respect to the consensus.

Across verticals there is no growth in rupee terms. That suggests that the environment is challenging. The stock may be re-rated.

ARUN KEJRIWAL, STRATEGIST, KRIS, MUMBAI

The drop in the quarterly revenue sequentially in rupee terms is a little disturbing.

The revenue guidance for FY13 seems reasonable.

R.K. GUPTA, MANAGING DIRECTOR, TAURUS ASSET MANAGEMENT CO., NEW DELHI

The results are in line with what the market was expecting, but all eyes were on the guidance.

Eight to 10 percent is an interesting guidance figure as normally Infosys is very conservative with their estimates. This figure makes me think that everything is well with the company.

Not only for Infosys, this is positive for the sector and the wider market, and I expect the market to react accordingly.