Infosys paints gloomy outlook for Q4

Company's ADR fell 7% on Nasdaq after CEO Shibulal's comments

Infosys, India’s second-largest information technology (IT) services company, on Wednesday, said it continued to see weakness in client spending throughout the current quarter ending March 31, 2014 (Q4), and the company might only be able to meet the lower end of its annual revenue growth guidance for FY14.

S D Shibulal, chief executive officer (CEO) and managing director (MD), said the factors that led to slowdown in client sentiment in Q4 might continue in the “initial part” of the next financial year (2014-15).

“Several factors (that played out during the quarter) may lead our revenues to be near the lower end of our guidance,” said Shibulal, during an investors’ meet organised by Barclays.

“At the broad level, some of our clients have seen slowdown in their businesses; these are happening across various verticals, leading to unanticipated project ramp-downs and cancellations in Q4. We have also seen some challenges in skill mismatches between the skills that clients need and what we have, which have led to slowdown in ramp-ups,” Shibulal said. “These factors are leading to decline in business momentum for us during the quarter.”

While Shibulal’s comments came after closing of Indian stock exchanges, Infosys’ American depository receipts (ADRs) fell around seven per cent on Nasdaq. The Bangalore-based company had shared a revenue growth guidance of 11.5-12 per cent for FY14.

Shibulal also added if Infosys reported lower-than-expected revenue growth in the current year, it would “set the base for FY15 and may impact FY15 growth rate”.

“For FY15, it is early to provide estimates, but we are in close discussions with our clients and expect to complete this exercise over the next one month. However, we believe that many of the factors that led to the slowdown (in Q4) will continue to impact our clients’ spending, at least in the initial part of FY15,” he said.

These remarks came at a time when investors and observers were beginning to believe that initiatives taken by Infosys after the return of its co-founder N R Narayana Murthy last year, had started to reap results and the company would benefit from the growth in demand.

Faith in the company’s revival was further strengthened after it posted better-than-expected performance for a third consecutive quarter in October-December of 2013.

However, Shibulal said, while the company’s initiatives were showing results, its performance going forward was likely to remain “choppy”.

“While we saw some results of our initiatives in our last quarter’s performance, we expect our performance to be choppy,” Shibulal said. “Even though some of our initiatives have started showing results, we believe it will take three years to reach our aspirational level.”

Analysts believe, Shibulal’s remarks are “worrisome” and might lead to some dip in the company’s stocks on Thursday. “It’s not so much about Q4, but the fact that Infosys believes the weakness can continue over the first half of FY15 is quite worrisome,” said a Mumbai-based analyst with a domestic brokerage.

MURTHY MAGIC FIZZLING OUT?

* FY14 revenue may meet lower end of guidance

* Some clients seeing slowdown in businesses

* Firm saw unanticipated ramp-downs, cancellations in Q4

* Fresh visa issues to start only in October

* Skill mismatch a challenge in Q4

* Performance to remain choppy going forward

* Hi-tech vertical continues to see headwinds