The quarter ending September in this financial year has been dramatically bad, so Infosys?s results were anticipated with a mixture of apprehension and dread. The anticipation has not been fully met in that the topline has been helped by sharp rupee depreciation. Infosys posted a 11.6% sequential growth in revenue while net profit rose by 10%. In fact, the topline of IT as a whole in the second quarter is expected to grow, quarter-on-quarter, by 5.6% to 9.3%. That not-too-bad news, however, needs to be factored against other disadvantages. Remember that 40% of Indian IT majors? growth comes from financial sector software demand. The crisis in global finance and the meltdown of big firms will have a biggish impact on revenues in the next quarters. So, Infosys lowering its dollar earning guidance is unsurprising. It had forecast that in 2008-09, dollar revenues will rise 19-21%. Now, it expects its revenue to be around $4.72-4.81 billion, down from earlier estimates of $4.97-5.05 billion. Infosys also significantly recorded a decline in its new client additions; these reduced to 40 in the September quarter from 48 a year ago. This is the second time that Infosys is lowering its fiscal-end guidance; the first time being in 2002. Now that the IT bellwether has cut its guidance, other Indian IT companies may follow suit.
For the Indian IT sector, while, in the long-run offshoring is likely to remain strong, in the short and medium term, growth will slow down and margins will be under pressure, leading to muted stock performance. The financial software domain may take time to pick up, and while other verticals, including manufacturing and utilities, have not yet seen a substantial drop in orders, a Western recession may alter the picture somewhat. This should be seen as an opportunity for Indian companies to look for new businesses: focus on Asia and other verticals instead of the US, EU and financial software. IT companies will be wondering how their stocks would behave when there is a turnaround, because valuations of most stocks currently are at an all-time low. Investors are unlikely to see any positive triggers in the near to medium term. That?s another reason IT companies must reorient their businesses.