Bloomberg News

Infosys Net Climbs 27% as Customers Outsource More Work

April 13, 2012

S.D. Shibulal, chief Executive officer of Infosys Ltd. Photographer: Namas Bhojani/Bloomberg

S.D. Shibulal, chief Executive officer of Infosys Ltd. Photographer: Namas Bhojani/Bloomberg

Infosys Ltd. (INFO), India’s second- largest software-services exporter, slumped the most in almost three years in Mumbai trading after forecasting sales that missed analyst estimates.

Sales in the year that began April 1 may be between 384.3 billion rupees ($7.5 billion) and 391.4 billion rupees, Bangalore, India-based Infosys said in a statement today. That lagged behind the 396.3 billion-rupee median of 64 analysts’ estimates compiled by Bloomberg. Infosys also reported fourth- quarter sales that trailed estimates.

Indian software exporters Tata Consultancy Services Ltd. (TCS) and Wipro Ltd. (WPRO) tumbled the most in six months after Infosys Chief Executive Officer S.D. Shibulal said the year ahead “looks challenging” for information-technology services. Amid outsourcing deals that are taking longer to finalize, researcher Gartner Inc. this month cut its estimate for 2012 global industry spending growth, citing the dollar’s gains.

“It’s a shocker,” said Ankita Somani, an analyst at Angel Broking Ltd. “The results are very bad, the guidance is very, very disappointing. They are guiding less than the rate at which the industry will grow.”

India’s software industry is estimated to grow between 11 percent and 14 percent, and Infosys’s guidance is lower than that, Somani said in a phone interview today, citing a forecast by the National Association of Software and Service Companies, a group of Indian information-technology companies.

TCS, Wipro

Infosys slumped 13 percent, the most since May 2009, to 2,402.55 rupees at the close in Mumbai trading. The stock was the biggest contributor to the benchmark Sensitive Index’s 1.4 percent decline. Tata Consultancy, India’s biggest software exporter, fell 5.6 percent, and Wipro, the industry’s third- biggest, slid 4.5 percent. Tata and Wipro have yet to report earnings.

“We had seen unprecedented convergence of various phenomena -- we’ve seen contract delays, we have seen slowness in decision making, we have seen ramp-downs in specific cases -- especially in financial services and in North America,” Shibulal told reporters at a briefing. “The budgets for next year are closed, marginally down or flat. But what we’re finding, especially in the financial services sector, is that spending seems to be almost month-to-month.”

Worldwide spending on information-technology services will increase at a slower pace of 1.3 percent to $856 billion this year after climbing 6.5 percent last year, Stamford, Connecticut-based research company Gartner said April 5.

‘Moving Away’

“Investors are moving away from Infosys to other IT majors like TCS and Wipro,” said Shishir Bajpai, senior vice president at Mumbai-based IIFL Wealth Management Ltd., which has $1.8 billion in stocks under management and advisory. “I won’t put the whole software industry in one basket. There’s no stress on the IT industry, it’s specific to Infosys.”

Infosys’s sales in the year ending March 31 in U.S. dollar terms may range from $7.55 billion to $7.69 billion, and earnings per American depository share may be in the range of $3.12 to $3.17, according to the statement.

“I think Infosys’s business model is likely to face challenges from two fronts -- their smaller, nimbler competitors like Cognizant who accept lower margins are getting better at delivery,” said Ankur Rudra, the top-ranked Infosys analyst, who rates Infosys sell at Ambit Capital Pvt. in Mumbai. “If Infosys wants the historical margins, it’s going to be difficult for them to grow in line with the industry.”

Cognizant Technology Solutions Corp. (CTSH:US), based in Teaneck, New Jersey, in February forecast 2012 revenue that topped estimates. The provider of technology consulting and outsourcing had an operating margin (CTSH:US) of 18.6 percent last year, compared with a 29 percent operating margin at Infosys, according to data compiled by Bloomberg.

Margin Pressure

The operating margin at Infosys may decline by as much as 200 basis points in the current quarter from the previous three- month period because of higher visa-related costs and local hiring in the U.S., Chief Financial Officer V. Balakrishnan told reporters. The margin may drop between 50 and 100 basis points in the year ending March 31, 2013, he said.

Infosys is facing a higher rate of visa application rejections in the U.S. and will hire more local workers, Balakrishnan said in an interview on Feb. 29.

“They are also seeing increasing competition from Accenture and IBM, who’ve become more competitive by scaling up their presence in India,” Ambit’s Rudra said.

India remains the most affordable location in terms of total employee cost for information technology services outsourcing, according to Anurag Rana, an analyst with Bloomberg Industries. At $23,829, the cost is lower than the $24,194 per worker in the Philippines and more than five times less than the $130,300 per full-time employee in the U.S.

Slow Deals

Fourth-quarter net income at Infosys rose to 23.2 billion rupees in the three months ended March 31 from 18.2 billion rupees a year earlier, the company reported today. That compares with the 23 billion-rupee median of 52 analysts’ estimates compiled by Bloomberg.

Sales in the quarter totaled 88.5 billion rupees, compared with analysts’ estimate for 91.7 billion rupees.

“Deals, which earlier took six months to get finalized, are now taking nine to 12 months,” Vihang Naik, an analyst at MF Global Sify Securities Pvt. in Mumbai, said before the announcement. “People are taking more time to evaluate the efficacy of the spend. Deal sizes are getting a bit smaller, nobody wants to commit on huge, big-budget deals.”

Infosys designs and builds software programs, maintains computers and provides consulting and outsourcing services for customers including BP Plc (BP/) and Neiman Marcus Group Inc.

Order Wins

Infosys won orders from ING Belgium, GlaxoSmithKline Plc, a North American telecommunications company and a utility company to end the 12 months to March 31 with a total of 694 “active” customers, compared with 620 a year earlier.

The software provider draws the majority of its revenue in dollars and euros from clients in the U.S. and Europe. Currency fluctuations and “an economic slowdown or other factors that help affect the economic health” of the U.S. and Europe were risk factors Infosys cited in its last annual report.

Customers in North America contributed 62.4 percent of the company’s revenue last quarter, down from 63.7 percent in the previous three months, and clients in Europe provided 23.1 percent, an increase from 22.6 percent in the preceding period.

The company said today it will pay a special dividend of 10 rupees a share. Infosys also will pay investors 22 rupees a share as final dividend.

“There is some conservatism that’s been built into our guidance because we’ve seen volatility in the recent past,” Balakrishnan said. “Looking at the guidance, the clients’ budgets, the way the economy is panning out, we believe that 8 to 10 percent is a growth we can achieve at this point in time. Who knows, if tomorrow there is some recovery and clients become more comfortable, they spend more, we may do better.”

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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Companies Mentioned

  • CTSH
    (Cognizant Technology Solutions Corp)
    • $50.37 USD
    • -0.04
    • -0.08%
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