Infosys in a mess: March quarter results disappoint as turnaround looks long way off

BANGALORE/NEW DELHI: Infosys Technologies' March-quarter results proved a big letdown for investors and analysts as signs of sustainable reversal of fortunes at the Bangalore-based information technology firm were conspicuously missing.

Despite aggressive sales positioning and flexibility in pricing, revenues reported in dollars grew at a tepid 1.4% sequentially, much below the 2-3% analysts were estimating. Further, the 6-10% revenue growth for FY2014 trailed the wider industry growth outlook of 12-14% by a fair margin.

Investors, who saw green shoots of recovery after Infosys' December-quarter outperformance, reacted sharply by sending its shares plunging 22% on BSE on Friday, where it closed at Rs 2,295.5 apiece.

"Global economic uncertainties remain challenging for the IT industry," said SD Shibulal, CEO and managing director of Infosys. "If you take financial services, their business prospects are flat or down. In retail sector, the run-the-business budget is under serious pressure and in manufacturing industry, (technology) budgets are expected to be flat in most cases."

The Bangalore-based company's conservative guidance was a surprise as broader commentary from the industry pointed towards an improvement in demand outlook for India's $108-billion ( 5.9 lakh crore) technology services industry with macroeconomic indicators stabilising in the US and Europe, which together contribute about 80% of revenues for the sector.

Margins to remain under pressure, says Shibulal




"The dismal quarter again raises the question whether Infosys' turnaround story is credible or not," wrote analyst Viju George in JPMorgan's note to clients. After the December quarter, JPMorgan had said "Infosys may be turning a quarter", and put an 'overweight' on the stock. CLSA, which also had an outperform recommendation, called the volatility in Infosys' performance "worse than a tier-2 IT company".

"(The) Street had simply gotten ahead of itself," said James Freidman, analyst with the Susquehanna International Group, about the stock market's sharp reaction. "Dalal Street and Wall Street have become overly reliant on Nasscom forecasts, and were holding Infosys to the 12-14% the industry body had predicted."

Over the past few quarters, analysts and industry observers, including sourcing advisors, pointed to Infosys becoming more aggressive in the marketplace, and willing to take on riskier deals involving taking over client employees or upfront investments. This was evident from the falling operating profit margins, which were at a historical low of just above 23%. Shibulal expects margins to remain under pressure as the $140-million expense related to previously announced wage increments will trickle into the current financial year. Further, in relation to the $350-million Lodestone buy in September, Infosys took a $36-million one-time charge, pulling down the March-quarter profits.

Infosys' earnings announcement came in the backdrop of speculation over whether the company would continue its practice of providing guidance. After stopping quarterly forecasts in the second quarter of last financial year, Infosys has stopped guiding earnings per share. This, analysts said, could be because of the company's lack of control over which way its costs might swing.

In another first, Infosys did not give a hiring outlook or announce salary increments for its 156,000 employees. Unlike at its peers, employee attrition has been slowly creeping up at Infosys, touching 16.3% in the just-concluded quarter, up from 14.7% at the beginning of the quarter.

Despite the cash reserves swelling by Rs 1,457 crore to Rs 23,958 crore, the management did not indicate any immediate plans to return the cash to shareholders. Like before, Infosys said cash is more important than ever, as the company pursues its long-term strategy of focusing on products and platforms-based solutions, which would require acquisitions along the way.

"We have a very successful products, platform and solutions business today, but unless we do an acquisition that will not move the needle," Shibulal said.