Infosys cuts outlook; TCS profit tops forecasts

by Reuters    Jul 13, 2012

TCS InfosysIT heavyweight Infosys has cut its sales forecast more deeply than expected after global economic uncertainty eroded tech spending, hitting both its shares and hopes for a second-half recovery.
While Infosys’s June quarter net profit rose 33 percent as expected, market leader Tata Consultancy Services exceeded forecasts by posting a 38 percent annual jump in quarterly profit.

The dull global economy, heavy competition for market share and sharp currency fluctuations have slowed the pace of growth for Indian outsourcing companies, although in recent quarters Infosys has been underperforming key rivals, including TCS.

Infosys, India’s No.2 software services exporter, had long been considered the industry bellwether for its ability to achieve and usually exceed revenue forecasts.

TCS, part of the Tata Group conglomerate that also makes cars and steel, does not make forecasts, although it said it expects to beat the industry export revenue growth forecast of 11-14 percent for this fiscal year set by trade body Nasscom.

Infosys said it sees revenue in dollar terms rising 5 percent to $7.34 billion in the fiscal year to March 2013, down from its April estimate of 8-10 percent growth.

Most analysts were expecting Infosys to trim its growth forecast to 6-8 percent.

“Infosys’s guidance is bad and it will have implications for the sector as well. It clearly reflects a slowdown in Europe and in the United States and (problems with) the company’s internal policies,” said Paras Adenwala, a fund manager at Capital Portfolio Advisors.

Pricing pressure weighed more heavily on Infosys than TCS during the quarter. Infosys’s billing rates were down 3.7 percent from the previous quarter, compared with 1 percent at TCS.
Infosys has been seeing “sporadic pricing renegotiations” and demands for discounts, chief executive S.D. Shibulal said.

Infosys shares closed down 8.4 percent. TCS shares ended 1.8 percent lower ahead of the results, and the sector index closed down 5.15 percent.

“We were expecting the (Infosys) guidance to be cut by 200 basis points, but it is much worse than that. Demand outlook for Infosys has worsened considerably,” said Ankur Rudra, an analyst at Ambit Capital.

Infosys, whose customers include Bank of America and BT Group, reported net profit of 22.9 billion rupees in the quarter.

Revenue rose 28.5 percent to 96.2 billion rupees as it added 51 clients in the quarter. It added a net 1,157 employees, lifting its headcount to 151,151.

By comparison, TCS posted net profit of 32.8 billion rupees, topping a forecast for 30.5 billion rupees, on a 38 percent increase in revenue to 149 billion rupees. It added 29 clients and 4,962 staff, bringing its workforce to 243,545.

“Customers understand that the macro is what it is and they have learnt to operate in that environment … so the decisions are getting made, deals are getting signed,” TCS CEO N. Chandrasekaran told reporters.

After it gave disappointing guidance during its April results announcement, Infosys came under fire from investors for what some said was an overly conservative approach that put it at a disadvantage to rivals, adding to pressure on Shibulal, who took the reins last year.

Infosys also held on to cash of $3.7 billion at the end of June, making some investors restless over its unwillingness to make a big acquisition or return some cash to shareholders.

“If you look at the environment, it is still very uncertain,” Shibulal told reporters on Thursday.

“In the financial services industry, in which we have 34 percent dependency, there were multiple events. I think sitting here in April, we could not have foreseen any of the events. The pipeline continues to be OK, but the question is how fast we can close (orders),” he said.

Infosys, TCS and Wipro are part of an export-driven outsourcing industry that benefits from efforts by global companies to cut costs and boost efficiency.

“Infosys is talking about an uncertain environment, clients not sure, budgets getting delayed, but if you look at TCS, they are saying clients are pretty aware, they have prepared the budget accordingly and they are spending their budget accordingly,” said Hardik Shah, analyst at KR Choksey Shares and Securities.

India’s $100 billion-a-year IT and back-office outsourcing sector earns about three-quarters of its revenues from customers in the United States and Europe and faces intense competition from global rivals including IBM and Accenture.

Gartner’s take on the IT results
“The results reaffirm the fact that company specific issues continue to plague the performance of Infosys, while the underlying health of the market was confirmed by TCS results. This is very clearly another strong step in the ‘changing of the guard’ on the Indian service provider landscape, with TCS taking over from Infosys as the industry bell-wether. It would be a mistake going forward to continue to tie the industry’s fortunes to that of Infosys, as the market has historically done. It is time to change that thinking now.,” said Partha Iyengar, Country Manager - Research, Gartner India and Vice President, Distinguished Analyst, CIO Research - Service and OT Management