Infosys falls from grace

Volatile quarterly performance and disappointing guidance could lead to a downgrade in the stock

Under-promise and over-deliver has been the credo that N R Narayana Murthy, Infosys co-founder, has lived by for years. Over the last year, the company has turned this credo on its head. In the fourth quarter, it failed to meet its own quarterly revenue guidance. At Rs 8,850 crore, revenues fell 4.8 per cent sequentially. The management, in a conference call with analysts, conveyed that its revenues fell short of its guidance because of “ramp-downs” by some clients in banking and financial services. The banking, financial services and insurance (BFSI) vertical fell 4.6 per cent sequentially because of slowdown in both maintenance and discretionary projects. This is bad news as the vertical contributes 35 per cent to the company’s overall revenues.

The markets seem to be running out of patience with Infy’s internal issues, impacting the company far more than the external environment. The stock opened 10 per cent lower on Friday after the company guided for a revenue growth of 8-10 per cent in 2012-13. Under normal circumstances, the structural debate would have again cropped up, but chief executive officer S D Shibulal clearly stated, “The guidance defines our reality.” When asked if Nasscom’s expectations that the sector would grow by 11-14 per cent seemed aggressive, Shibulal deflected it by saying, “the band is a very wide one”.

Even in 2007-08, the company missed its annual guidance by 2.8 per cent, analysts believe, the environment doesn’t seem as ‘challenging’ as Infosys would like the market to believe. A few weeks ago, Accenture closed its second quarter with revenue growth of 12 per cent year-on-year ($6.8 billion in dollar terms). The company even increased its guidance for the full year. Thus, analysts are not convinced there is a problem in the information technology services environment that Infosys is talking about.

Barclays says, “We are not worried on the structural debate regarding offshoring — concerns resurface with every weak quarter. The company’s performance is volatile and the management’s ability to predict this performance has become less accurate in the face of poor visibility in the macro environment. We expect this to continue for some time and, hence, continued pressure on the stock.”

Even if one presumes it’ll grow at the guided 8-10 per cent in 2012-13, the company will need to grow revenues at between 2.6 and 3.2 per cent each quarter. Considering the first-quarter guidance is at zero to one per cent, growth in the remaining quarters needs to be over 3.5 per cent.

Analysts say the company is not flexible and nimble in the market place, which is why it is losing deals. Infy’s insistence on holding on to the high-margin model is impacting growth. Over the last few quarters, analysts believe, a few big clients have not renewed deals with Infosys in the BFSI vertical. The stock is surely headed for a de-rating, as the market has so far been paying a premium for superior growth and earnings. If this premise changes, so will Infy’s P/E multiple.