Infy cuts FY12 guidance on Europe concerns

Last Updated: Fri, Jan 13, 2012 04:11 hrs

Infosys cut its annual revenue growth outlook for the second quarter in a row and warned of lower client spending due to the crisis in Europe, sending its shares down 8.4 per cent, their biggest fall in nine months. The guidance dragged down other IT stocks as well, with Tata Consultancy Services and Wipro falling four per cent and 2.5 per cent, respectively.

Infosys forecast dollar revenue growth of 16.4 per cent for the financial year to March 31, down from the 17.1-19.1 per cent projected in October. The company said it had seen business sentiment worsen marginally since November.

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"Customers haven't yet finalised their information technology budgets for the year and indications are of flat or reduced spending, Infosys CEO S D Shibulal said. "Customers are very cautious, even if they have a budget, they don't spend," CFO V Balakrishnan said. "We believe that cautiousness will remain for some time. The European recovery is not in sight."

The weak guidance overshadowed the third-quarter results that met Street guidance (and, for many, exceeded expectations) with net profit at Rs 2,372 crore, up 33.3 per cent year-on-year. On a sequential basis, the firm's net profit was up 3.3 per cent. "The guidance is particularly disappointing given that Q4 FY12 will have an additional working day due to the leap year, which should add about 1.5-1.6 per cent to revenue growth. Hence, the company has effectively guided for a decline in sequential revenues adjusting for the extra day," said Viju George and Amit Sharma of JPMorgan, Asia Pacific Equity Research, in a note.

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The company defended its stand in giving a lower guidance for two consecutive quarters. "Last quarter, the reason to cut our guidance was the rupee factor. However, this time we came back in the middle of the quarter and shared with investors we would be able to meet the lower end of the guidance. Our guidance is a factor of what we see now," Balakrishnan said.

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Aided by a falling rupee against the US dollar, the company's revenue in the third quarter grew 30.8 per cent year-on-year to Rs 9,298 crore. Revenue in dollars for the quarter was $1,806 million, up 13.9 per cent y-o-y. October-December is traditionally a slow quarter, but Infosys managed to have a volume growth of 3.1 per cent. The depreciating rupee also aided Ebit margins by 300 basis points.

The management also maintained it had not seen any cancellations, or a demand for renegotiation from clients. For FY13, there is uncertainty over client budgets. The management expects IT budgets for FY13 to be flat to negative.

During the quarter, Infosys added 49 clients, of which five signed large deals. A surprise in the quarterly numbers was its performance in the US and Europe. Despite positive news from the US on its economy, as a market Infosys saw the region grow marginally by one per cent. Europe, embroiled in a sovereign debt crisis, grew 14 per cent on a sequential basis. India, APAC and other regions grew only 0.4 per cent.

Analysts tracking the company wondered if the disappointing guidance was the story for FY13. "In the larger scheme of things, these are defining times for Infosys and others. With the European crisis not showing immediate signs of recovery, the next few quarters could be challenging. Only companies with strong fundamentals, customer relevance, distinguishing business models and deep customer connects will witness strong growth. Companies will have to undergo a fundamental shift in how they view the IT services business, going forward," said Praveen Bhadada, Director, Zinnov Management Consulting.

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