Infy cuts revenue forecast

Q2 net profit up 6.1% at Rs 3,606 crore; revenue grows 10.1% to Rs 17,310 crore

Infosys, India’s second-largest software exporter, has cut its annual revenue forecast for the second time in three months, as customers in banking and technology sectors cut or delayed projects, indicating that the Indian information technology (IT) sector’s woes continue due to global business uncertainty.

Infosys’ new forecast is that it will grow eight to nine per cent in dollar revenue, down from 10.5 to 12 per cent it projected in July. The lower forecast indicates that Infosys will see flat revenue over the next six months, analysts said.

The firm said the cancellation of a contract by the Royal Bank of Scotland and other project scale-downs forced the company to lower the forecast in the second quarter, when it beat profit and revenue estimates.

The slow growth projection will put more pressure on chief executive officer Vishal Sikka to achieve his revenue target of $20 billion by 2020, with 30 per cent margins and a per-employee productivity of $80,000.

“It is an aspiration and it is such a steep target. That’s what makes it exciting to go after. However, our guidance is based on the near-term,” Sikka told reporters.

In the short term, software lobby Nasscom will be forced to reduce its growth estimates for the $108-billion Indian IT industry as the top players are facing the brunt of an uncertain global economy. In April, the industry body had projected 10-12 per cent growth for the year.

Sikka said on Friday that the company had won large orders of $1.2 billion in the three months, which was good in a “difficult and structurally challenging time”.  

Profits in the quarter between July and September grew 6.1 per cent to Rs 3,606 crore and revenue at 10.1 per cent to Rs 17,310 crore over the year-ago period. Infosys had posted profits of Rs 3,398 crore on revenue of Rs 15,635 crore in the same period last year. Operating margins, calculated as revenue minus costs, improved by 80 basis points to 24.9 per cent as the company focused on efficiency by increasing work offshore and reducing onsite.

While the revenue grew 3.14 per cent over the previous quarter, pressure on pricing from customers impacted the benefits it earned from generating higher volume of business.

“On a year-on-year basis, our volume grew 12-13 per cent but the revenue growth was lower than that. This (pricing pressure) is what is happening. The only way to compensate is to bring more productivity benefit from automation,” Sikka said in an interview.

Sikka emphasised that the long-term benefit for the company and the industry was “cost-based, people-only model to one in which people are amplified by software and artificial intelligence”.  

“Infosys results are better than TCS’ and even though outlook is muted, the company is likely to outgrow TCS in FY17 constant currency revenue terms. Infosys is trading at around 10 per cent discount to TCS on consensus FY18 price-to-earnings multiple. We expect the discount to narrow. Prefer Infosys over TCS,” said Govind Agarwal, research analyst (institutional equities) at Prabhudas Lilladher in a note to clients.

On Thursday, larger rival Tata Consultancy Services (TCS) called the second quarter ‘unusual’, saying there is caution among customers due to “growing uncertainties in environment”.

TCS reported an 8.2 per cent increase in profits at Rs 6,586 crore as revenue grew 7.8 per cent to Rs 29,284 crore. The company grew its dollar revenue over the quarter by one per cent, the lowest for the company in over a decade. TCS had posted profits of Rs 6,085 crore on revenue of Rs 27,165.5 crore. Europe was the key market to drive growth for the company.

Meanwhile, Infosys appointed D N Prahlad, a former employee and a relative of founder N R Narayana Murthy, as an independent director on the board. The firm also revised compensation for its senior management by increasing the variable part of the salary and giving stock options to push them to achieve higher revenue targets.

The Infosys stock closed Rs 24.65 or 2.4 per cent down at Rs 1,027.4 on Friday, making the IT index fall by 51 points or 0.5 per cent to close at 10,155.12 points.

The BSE Sensex ended up 0.11 per cent or 30.49 points to close at 27,673.60.