Here's why Infosys guidance of 7-9% is not good enough

Bangalore-based Infosys stock was up almost 4.7% during trading hours as the company managed to give numbers that met with street expectation for the fourth quarter of FY14. Éven though the company's guidance for FY15 is lower than Nasscom's industry growth projection, it met with analysts estimate.

Infosys also managed to meet the lower end of its revenue guidance for FY14 as its reported revenue ($US) growth of 11.5%. Infosys had guided for growth of 11.5-12%. The management had hinted that it will manage to meet the lower end of guidance.

However, a closer look at the numbers shows a clear picture that pressure for growth in the company continues. And the current restructuring and senior management exits has hampered its growth track. For the fourth quarter the company's revenue dropped 1.2% sequentially in Indian rupee term and was flat in US dollars.

S D Shibulal, CEO & MD of the company while addressing the media said that revenues were down due to ramp down in certain verticals and continued pressure in sectors like retail, Hi-tech and CPG. Add to this volume for the quarter at 0.4% was also disappointing. Fourth quarter is generally a slow quarter for IT industry.

He further added: "Discretionary spends continues to be slow and deal cycles in this segment are longer." For Infosys, North America was down 0.8% and Europe which has been actively signing outsourcing deals, has grown just about by 1%.

Infosys is perhaps the only IT services firms which continues to talk about ramp-downs. This when all the indicators hint towards a healthy deal pipeline and an improving macro environment. The recent ISG Outsourcing Index, one of the largest independent third party deal advisor for the first time reported a positive growth in new scope of activity and a high restructuring activity.

Secondly, the firm's guidance for FY15 though is what the street had accounted for it is way behind what Nasscom has guided for of anywhere closer to what Cognizant has guided for. The 7-9% is way lower than Nasscom's 13-15 per cent and Cognizant's 16.5 per cent.

More importantly, Infosys is still battling on the employee front. For the fourth quarter attrition was again high at 18.7%, this was at 18.1 per cent in the December ended quarter. The company needs to get a hold on this to be able to run faster. With revival in both the majority markets-the US and UK-Infosys will need to have enough bench strength too be able to capture growth.

Attrition has remained high despite the firm doling out salary hikes. This quarter too Infosys said that they will give salary hikes of 6-7 per cent for offshore employees and 1-2% for onsite. This is second hike in the last nine months. But that has not helped in reducing the attrition. Competitors such as TCS and Cognizant have maintained attrition at 9-10%.

During the quarter, Infosys said it added 50 clients and managed to sign four large deals with the total contract value of $700 million. But the gross client addition for the full year seems to be just three. For FY14 the total count (gross) of client was 238, from 235 last fiscal. Add to this the number of clients in the $200million segment has come down to three in the fourth quarter from last quarter's four. And clients in the $100 million bracket were down to 13 from 15 on sequential basis.

For Infosys, which has embarked on a road to find a new CEO, the need to get on to growth track is crucial. Otherwise catching up to peers will be difficult.