Near-term clouds loom over Infosys

After Nasdaq-listed Cognizant spooked the market by hinting at a slower growth in 2013, it is the turn of Infosys to sound an alarm bell. The IT bellwether said its modest five per cent dollar revenue growth for FY13 may be under threat.

During its discussion with analysts, the Infosys management said the company’s growth might be hit due to delays and postponements in a few large deals, delayed decision-making by clients due to early start of the holiday season and natural events such as Hurricane Sandy. Analaysts have cut the growth forecast for Infosys. “We cut our growth forecasts for the next two quarters and organic revenue growth for FY13 to 3.8 per cent year on year,” said Bhuvnesh Singh and Vaibhav Dhasmana of Barclays Equity Research in their report titled ‘Infosys Ltd: Near-term challenges persist’.

Barclays said Infosys’s new chief financial officer, Rajiv Bansal, was holding one-on-one conference calls with analysts. “We believe that while the company is proactively taking steps to revive its growth trajectory, this would take time to yield tangible results. The near-term challenges put the five per cent year-on-year growth guidance for FY13 at risk,” said Singh and Dhasmana in their report.

The Infosys management stated it continued to see challenges in the banking, financial services and insurance (BFSI) vertical, with an increased uncertainty. The company added it had received indication from clients in the hi-tech segment of a “longer than normal furloughs” in December. Hi-tech’s contribution is about 45 per cent to Infosys’s revenue.

A note by Kotak Institutional Equities Research said: “Infosys may fall one-two per cent short on its ‘at least five per cent’ organic revenue guidance for FY2013E. We hope that the company uses the coming quarter to either give confidence on the guidance process and execution to the street or stop giving guidance in case it has low confidence on demand environment/execution.”

Infosys has stopped providing quarterly guidance. It has missed street expectations in six of the last seven quarters.

According to analysts, with the five per cent organic revenue under threat, the company might also not be able to meet its margin outlook.

“We note that while Infosys’s revised guidance of ‘at least five per cent’ organic growth implied a 3.7 per cent CQGR (compounded quarterly growth rate) through H2FY13, the street including us have been factoring in less that six per cent dollar revenue growth, despite incorporating the benefits from the Lodestone acquisition,” said a note by Emkay Global Financial Services.

Meanwhile, Infosys is changing its strategy to accelerate growth. For this, the company is decentralising decision making towards business and vertical heads and away from the CEO/CFO office, stated the Barclays note.

The company is also setting up systems and mechanisms to better match demand against hiring considering the 18-month lag between hiring and actual flow of business.