Infosys results spell trouble for sector

Last Updated: Apr 16, 2011, 12:06 PM IST

Bangalore: Infosys Technologies Ltd, India`s No 2 software services exporter, sparked worries about the sector`s growth after it forecast annual sales lower than expected on slower client spending, knocking its shares down nearly 10 percent.

Kicking off results for the nearly USD 60 billion IT sector on Friday, Infosys estimated tepid revenue growth due to global economic uncertainty and said margins would decline for the year ending March 2012, highlighting currency risks for the export-focused sector.

"Based on what Infosys has reported and forecast, people will taper down their earnings estimates for the top players in the sector," said Tejas Doshi, vice president of research at Sushil Finance in Mumbai.

Bangalore-based Infosys, seen as a benchmark for the Indian outsourcing sector, has missed analysts` profit estimates for the third time in four quarters.

"You are seeing high fluctuations in the client spending due to global economic uncertainties. Margins will remain under pressure for the companies," Doshi said.

Infosys, larger rival Tata Consultancy Services and No 3 player Wipro have been battling a strengthening local currency and pay increases for staff as they fight to retain talent while competing with rivals such as IBM and Accenture.

Infosys Chief Operating Officer S D Shibulal said the company expected to raise wages 10 to 12 percent in fiscal year 2012, while likely not being able to raise pricing. "We have assumed for all our guidance purposes flat pricing," Shibulal said.

Infosys, which has 130,820 staff, plans to add 45,000 more this year.

In the latest management shakeup in the sector, Infosys said its human resources chief, T V Mohandas Pai, had quit. Pai, the former CFO, was widely seen by analysts as the only non-founder who could become CEO. Pai joined Infosys in 1994 and was a member of the board since May 2000.

"We have had transitions in the past...these things are part and parcel of a growth of a corporate and what is good is that we have the leadership required to manage these transitions," Chief Executive S. Gopalakrishnan said, referring to Pai`s move.

Infosys`s chairman is slated to retire in August this year, prompting media reports he would be replaced by the current chief executive in a move that would create a vacancy for the top job. Infosys` board would meet on April 30 to discuss succession plans.

In January, Wipro replaced the chiefs of its key outsourcing business after struggling to keep up with peers.

Indian companies are seeing a shakeup in top management as some founder-led firms seek to resolve succession issues and others look to revamp strategies amid intense competition from domestic and overseas rivals.

Infosys shares ended 9.6 percent lower on Friday, the biggest daily fall since May 19, 2009, and rival Wipro dropped as much as 5 percent. The sector index fell 6.3 percent in a broader market down 1.5 percent.

More than 10 million shares were provisionally traded on the National Stock Exchange, more than 10 times its 90-day daily average volume.

Economic worry weighs

"The biggest concern for Infosys` prospect this year is the slow recovery of the US and European economy," said Eric Lin, manager of the India fund at Prudential Plc`s fund unit in Taipei.

Infosys expects revenue for the fiscal year 2012 to rise between 18 percent and 20 percent to USD 7.1 billion and to USD 7.3 billion versus analysts` consensus forecast of USD 7.3 billion.

"There is pressure on margins. That is a combination of both cost pressures and the rupee. Even the outlook is below market expectation," said Nitin Jain, Singapore principal investment manager at Kotak Mahindra`s fund management unit.

"The revenue guidance is broadly in line with expectation, but where we see some disappointment is lower earnings guidance which means there will be margin pressures," Jain said.

Infosys projected profit per American shares for this fiscal year to rise between 8 percent and 10 percent to USD 2.83 to USD 2.88 compared to consensus of USD 3.10.

"We don`t think the result will hurt Infosys` leading position in the industry. The company has a cash-cow business, and its long-term competitive edge remains," said Prudential`s Lin.

Infosys, founded in 1981 by seven engineers with USD 250 borrowed from their spouses, reported a net profit of 18.2 billion rupees (USD 408.5 million) versus 16 billion rupees a year ago.

Revenue rose 22 percent to Rs 72.5 billion as the firm added 34 new clients in the fiscal fourth quarter to take the tally to 620.

This compares with a Reuters poll forecast for net profit of 18.8 billion rupees and revenue of Rs 74.6 billion for Infosys, whose clients include Goldman Sachs, BT Group and BP.

The company`s operating expenses rose to 9.1 billion rupees in January-March from Rs 7.4 billion a year ago. It added 3,041 staff, its slowest pace in three quarters.

Infosys, which boasts higher profit margins versus local and global peers, said its margins could decline nearly 3 percent this fiscal year, mainly due to volatility in local currency.

Infosys had operating margin of 30.2 percent versus 28.1 percent for Tata Consultancy and 11.9 percent for Accenture, as per the latest data from Thomson Reuters StarMine.

Indian software companies hedge some of their currency exposures, but a chunk of their costs are in rupees and appreciation of the local currency tends to squeeze margins.

"Currency volatility continues to be a challenge," Chief Financial Officer V. Balakrishnan told reporters in Bangalore.

Bureau Report

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