Infosys results may stumble on global headwinds, rupee rally

Firm is also fighting battle to come out clean from complaints of governance lapse

Infosys, a bellwether for India’s information technology services industry, is expected to forecast single-digit growth for financial year 2017-18 (FY18), highlighting challenges faced by the export sector in the wake of visa restrictions, and business shifts towards digital and cloud.

The company, which will announce its results on Thursday, is likely to see headwinds due to pricing pressure, delay in revenue contribution from its digital technology initiatives, and additional cost for more local hiring.  

Beyond business challenges, the firm is fighting another battle to come out clean from complaints of governance lapse, pertaining to acquisition deals and severance pay to former key employees.   

Infosys revised its guidance for 2016-17 three times, citing global macroeconomic situations, to settle between 8.4 and 8.8 per cent growth.

At least two major brokerage firms have forecast that Infosys may announce seven to nine per cent growth guidance for FY18, majorly owing to poor business in the second half of last year, rupee appreciation, and impact of higher cost for H1B visa and local hiring in the US. 

Madhu Babu, IT analyst at brokerage firm Prabhudas Lilladher, says the company will not take an aggressive approach like last year to announce 12 to 13 per cent guidance and revise it thrice. 

“Infosys may give a conservative guidance for the full year considering currency headwinds, pricing pressure and increase in cost for more local hiring. Even if there was chance for suspending the guidance, the company will have to announce guidance like its peers in the US as it is listed on Nasdaq,” says Babu. 

Gautam Duggad, head of research at Motilal Oswal brokerage firm, says, “We expect Infosys to guide seven to nine per cent growth (in constant currency) for FY18 on the back of a relatively weak exit in the second half (of the last financial year).”

The company’s growth in the fourth quarter of 2016-17 is expected to be near one per cent. 

Here are five things to watch out for when the second biggest software exporter from India announces its results on Thursday:  

Global headwinds and business shifts

The geopolitical environment is yet to revive for the IT services industry, including Infosys, with delay in decision-making in Europe after Brexit and protectionism in the US. Infosys management commentary on business environment in Europe and the US are important to note. Last month, its global rival Accenture reported eight per cent growth in outsourcing services, which potentially indicates there is a shift by clients to move from focusing on the front-end through digital projects to the back-end, where there is a need for traditional IT services. Infosys view would also indicate how the outsourcing industry is geared up to meet this business shift.

Sikka’s 2020 Vision

The company set a goal to reach $20 billion in revenue and 30 per cent margin by 2020. While the company is expected to cross $10 billion in revenue in FY17, considering its more than eight per cent growth, analysts say that another $10 billion growth in two years is difficult. Infosys management commentary on this goal will be important because most of the compensation of senior executives is linked to this target, despite Infosys Chief Executive Officer Vishal Sikka claiming the targets as an aspiration and not definite.

Share buyback to improve EPS value 

At least three equity analysts say Infosys should opt for a share buyback as it is sitting on cash pile without making right acquisitions at a time when returns from the IT stocks are not good. Duggad says Infosys is the only company among the tier-I IT services company yet to announce a share buyback. The buyback may be announced on April 13 when it announces Q4 results. Given the return on the company’s stock, a share buyback programme is likely to improve its earnings per share. 

Murthy and corporate governance

Infosys founder N R Narayana Murthy has raised concerns about poor corporate governance. Several steps, such as bringing in law firm Cyril Amarchand Mangaldas to negotiate and address concerns of Murthy and other shareholders, announcing an inquiry into a whistleblower complaint on the acquisition of Israeli firm Panaya, have been taken. The company is expected to give clarity on these issues.

Rupee appreciation to hit margin

Coupled with its existing challenges from declining growth in traditional technology services, a strong rupee may impact the profitability and margin of Infosys for the next few quarters, say analysts. The value of the rupee may appreciate to 64 against the US dollar. Babu of Prabhudas Lilladher says the margin may drop by up to 40 basis points compared with the year-ago period mainly, due to rupee appreciation. Infosys margin is expected to range between 27 and 27.2 per cent for the quarter ending March 31.