UPDATE 3-India's Infosys growth outlook disappoints investors

Last Updated: Fri, Oct 12, 2012 10:00 hrs

* Maintains FY13 revenue growth view of at least 5 pct

* Sees earnings per ADS at least $2.97 vs prior $3.03

* Shares drop nearly 9 pct, pare losses later

By Harichandan Arakali and Aradhana Aravindan

BANGALORE/MUMBAI, Oct 12 (Reuters) - Indian software services provider Infosys Ltd again disappointed investors hoping for a more robust growth outlook, undermining its standing as the country's information technology bellwether and sending its shares down by almost 9 percent.

The company that once symbolised India's rise as an outsourcing powerhouse has delivered a series of disappointing growth targets since January as its internal reorganisation to better compete with the likes of Accenture PLC takes longer than hoped.

"It's a case of escape to a new orbit or stall and fall, and at the moment they are stalling, but that doesn't mean the story is over," said P. Phani Sekhar, a fund manager at Angel Broking in Mumbai, which owns Infosys stock.

Infosys expects revenue of at least $7.34 billion, or growth of 5 percent, for the year ending March, the company said on Friday, unchanged from its previous outlook. That excludes any additional revenue from its acquisition of Swiss consultancy Lodestone.

Analysts had predicted Infosys would raise its revenue growth forecast to around 6 percent after it agreed last month to buy Lodestone, the company's biggest overseas acquisition.

In July, Infosys cut that forecast to 5 percent from its April estimate for 8-10 percent growth, catching investors by surprise as global economic uncertainty hit tech spending.

Infosys reported weaker-than-expected operating margins for the quarter ended Sept. 30, adding to pressure to revive its business as the company loses market share to local rivals including Tata Consultancy Services Ltd (TCS).

Shares in Infosys, which have underperformed its competitors for over a year, slumped as much as 8.8 percent after the earnings report. They pared their losses after the company clarified its revenue guidance excludes sales from Lodestone.

"The margins were clearly a disappointment, but there are some positives that one can say that perhaps things have bottomed out for this company," said Bhavin Shah, chief executive of Equirus Securities, who has a 'trade' rating on the stock, which is equivalent to 'neutral.'


Profit at Infosys, whose clients include Bank of America , Volkswagen and GlaxoSmithkline, rose 24 percent to 23.7 billion rupees ($450 million) for the quarter that ended in September from a year earlier.

That was in line with analyst expectations of 23.8 billion rupees, according to Thomson Reuters data.

But operating margins in the quarter fell 160 basis points from the preceding quarter to 26.3 percent after the company raised wages for 20,000 employees in the April-to-June period.

Infosys added 39 clients in the latest quarter, its slowest pace of addition in six quarters.

The company said on Friday that it expects operating margins will decline by 200 basis points in the current fiscal year.

The company also cut its full-year outlook for earnings per American Depository Share to at least $2.97 from $3.03 previously, due to foreign exchange volatility.

Earnings per India share are forecast to rise 10.3 percent, down from its July view of 14.4 percent.

"The guidance remains weak from an earnings perspective. It's been cut more than people thought it would be," said Ankur Rudra, an analyst with Ambit Capital in Mumbai.

Investors had seen some signs of stability for the global economy and hoped for an uptick in demand, although the International Monetary Fund warned this week that the United States and Europe - the main markets for India's $100 billion software and services outsourcing industry - could slide back unless they resolved their debt troubles.

"Overall, there is disappointment, but marginal. We expect Infosys to improve QoQ (quarter on quarter) growth rates in line with the macro improvement," said Dipen Shah, the Mumbai-based head of private client group research at Kotak Securities.


Infosys mainly competes for orders in the more commoditised sectors of maintaining computer systems, software applications and helpdesk support. Rivals TCS and HCL Technologies Ltd have aggressively chased such contracts.

TCS, the bigger rival of Infosys, is seen posting a 35 percent rise in quarterly profit to 33.1 billion rupees when it reports earnings on Oct. 19.

To fight the competition, Infosys has been trying to focus more on higher-value software and consulting.

Infosys agreed last month to buy Lodestone, a specialist in advising companies such as BMW AG and Roche Holding AG on how best to use SAP AG's business management software.

Infosys has seen a series of top-level executive changes in recent years. It will do so again, as CEO S.D. Shibulal reaches the mandatory retirement age of 60 in less than three years.

Long-time Chief Financial Officer V. Balakrishnan has been seen as a potential successor, and on Friday, the company said Balakrishnan would give up his CFO position from Oct. 31 to head the company's business process outsourcing unit, banking product unit and India business unit.

"Heading these businesses constitutes running and managing a P&L, perhaps positioning him as a possible contender for the CEO role post-Mr. Shibulal," JP Morgan analysts said.

Balakrishnan will be replaced by Vice President of Finance Rajiv Bansal.

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