1. Impacted by digital, pricing power, Infosys cuts sales forecast

Impacted by digital, pricing power, Infosys cuts sales forecast

Structural issues such as increasing digitisation and slowing discretionary spends in the wake of uncertainty surrounding Brexit and the US presidential elections are stymieing growth at the country’s top IT companies.

By: | Bengaluru | Updated: October 15, 2016 6:59 AM
Infosys An immediate fallout of this was seen on Friday with Infosys paring guidance for the second time in three months to a revenue growth. (Reuters)

Structural issues such as increasing digitisation and slowing discretionary spends in the wake of uncertainty surrounding Brexit and the US presidential elections are stymieing growth at the country’s top IT companies. The gust of global headwinds is threatening to blow away Nascom’s 10-12% revenue projection for FY17.

An immediate fallout of this was seen on Friday with Infosys paring guidance for the second time in three months to a revenue growth — in constant currency terms — of just 8-9% this year, lower than the 11.5-13.5% it had hoped for in April. “Say it like you see it,” CEO Vishal Sikka quipped at a media conference, saying the near-term outlook was uncertain, the tone somewhat in contrast to that of Tata Consultancy Services’ chief N Chandrasekaran’s assertion on Thursday that the fundamentals were fine and that the coming quarters could be better for the firm.

Sikka pointed out the commoditisation of services was becoming a problem. Moreover, increasing digitisation was hurting IT. “We are being impacted by digital,” Sikka said after the firm reported Q2FY17 results. Other pressure points the CEO highlighted were limited pricing power and heightened competition, factors that are prompting analysts to downgrade earnings estimates.

Top IT firms have turned in an uneven performance over the past couple of years. Infosys reported a rise in dollar revenues of 3.5% sequentially in the September quarter boosted by a volume growth of 4%. However, in the June quarter performance was a poor 2.2%.

On Thursday TCS reported results that left the Street disappointed, compelling analysts to downgrade earnings estimates.

While a moderation in IT spends by corporations worldwide and little pricing power is hurting IT firms across the board, analysts say competitive pressures and a high exposure to global banks some of which are insourcing and building their captive IT units are also hurting business.

The fact is growth at TCS has been slowing for more than seven quarters now. Analysts believe that apart from the slowing spends by corporations, efforts by the competition to win back share are hurting TCS. Moreover, the “high concentration to legacy services that are facing elevated deflationary pressures” is not helping, they say.

Infosys’ net profit for the September quarter rose 5.5% sequentially in dollar terms to $539 million, exceeding market expectations. Operating profit margins increased 80 basis points sequentially to touch 24.9% buoyed by operating issues and the ability to navigate currency headwinds.

The lower guidance nevertheless sent the stock down 2.34% to close at Rs 1,027.40 on Friday. Analysts at Credit Suisse the revised guidance was lower than their estimate of 8.5-9.5%. “More importantly, this implies a particularly weak second half,” they added.

On Thursday, TCS disappointed with a tepid top-line growth of 1% (constant currency), in what is a seasonally strong quarter. The key BFSI vertical grew just 1.2% sequentially while the retail vertical saw revenues drop. However, margins saw an uptick of 95 basis points at 26%, with operational efficiencies kicking in, despite currency issues arising out of the sharp depreciation of the pound. Both firms won deals during the September quarter — Infosys six and TCS nine — and both CEOs claimed the deal pipeline was healthy.

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