Infosys Ltd cut its full-year revenue growth forecast in dollar terms on Monday, citing the potential adverse effects of cross-currency movements, although it reported higher-than-expected revenue for the second straight quarter.
India’s second largest software services firm lowered its revenue growth forecast for the year ending 31 March 2016 to a range of 6.4-8.4% in dollar terms, from an earlier forecast of 7.2-9.2%.
The revision jolted investors. Infosys shares fell 3.88% to Rs.1,122.50 on BSE on a day the benchmark Sensex shed 0.65% to 26,904.11 points.
Infosys retained its earlier revenue growth forecast of 10-12% in constant currency terms for the fiscal year, but warned that growth in the October-December quarter may not be better than the 0.8% increase in the year-ago period.
“Our endeavour, our wish is to be (better than the year-ago period) but our visibility is that it will not be,” Vishal Sikka, who took over in August 2014 as Infosys’s first non-founder chief executive, said in an interview.
In the three months ended 30 September, Infosys posted 6% growth in revenue on top of a 4.5% increase in the June quarter. It added 82 clients in the quarter to take the total number of active clients to 1,011.
Infosys’s revenue jumped 6% sequentially to $2.39 billion.
Worryingly for the country’s $146 billion outsourcing sector, slow demand growth that Sikka referred to was on account of clients across industries holding back on technology spending— a factor that’s not limited to Infosys.
If it pans out, this could mean that Infosys’s larger rival Tata Consultancy Services Ltd (TCS)—which posted a 3.5% sequential revenue growth in the first quarter—could find it challenging to match the 12-14% year-on-year growth that industry body Nasccom has forecast for the software services sector this fiscal year.
TCS is scheduled to report its second-quarter earnings on Tuesday.
“Traditionally, Infosys is the first to actually give any trend of any industry slowdown. Since the company has said it is seeing softness in demand, this actually puts TCS under pressure,” said a Mumbai-based analyst at a domestic brokerage firm. “It remains to be seen if the company will be able to grow even at 14%.” He declined to be named.
Infosys’s new chief financial officer Ranganath D. Mavinakere said that even if the company experiences “flat growth” in the third and fourth quarters, the company will still be able to end the year with growth at the “upper end” of its 10-12% forecast in constant currency terms.
Infosys appointed Mavinakere, formerly head of strategic operations and CEO’s office, as the new chief financial officer, after Rajiv Bansal decided to quit. Bansal will be an adviser to Sikka and his team until the end of December.
For the July-September period, Infosys’s net profit improved 10% sequentially to Rs.3,398 crore and revenue jumped 17.2% to Rs.15,635 crore in rupee terms.
A Bloomberg poll of 22 analysts estimated that the company would post a net profit of Rs.3,287 crore and revenue of Rs.15,211 crore.
Infosys’s growth was led by a 6.1% improvement in the US, which accounts for more than 60% of the company’s total revenue. Revenue growth in Europe, which brings in about one-fourth of revenue, improved 8.3% in the July-September period.
The banking, financial services and insurance sector, which accounts for 33% of the company’s revenue, grew 5.2% over the three-month period; business from retail and consumer clients saw a 7.9% improvement.
“It is an excellent set of numbers, as it’s more broad-based growth, across industries and geographies,” said the second Mumbai-based analyst working at a foreign brokerage firm. He didn’t want to be named.
Operating profit margin widened 1.52 percentage points sequentially to 25.54%, on account of improving utilization rates and an added 70 basis points gains made on cross-currency movements. One basis point is 0.01%.
Since taking the helm, Sikka has been pushing the company to embrace automation and other new technologies to stay competitive amid pricing pressure for traditional IT work.
Infosys is also making its engineers adopt the user-centric approach of problem-solving called design thinking, to open new revenue streams.
“I’m very optimistic and we are already seeing the benefits (of the changes put in place),” Sikka said, after the company reported its earnings.
But some experts said that it is still early to say if Infosys under Sikka has indeed made a turnaround and it could be a “long bumpy road” ahead for the current management.
“Ever since Vishal took over the reins at Infosys, we cautioned that the road to recovery will be a bumpy one. Its Q2 results appear to underline exactly that. Sound quarterly results were clouded by a softening in the outlook,” said Thomas Reuner, managing director of IT outsourcing research at HfS Research.
“The key issue is change management, both with a set a clients and also as the company internally shifts to embracing automation as it is disrupting Infosys’s workforce as Vishal pointed out. Crucially, we have to remember that the secular macros have not changed. Vishal and his management team continue to have their work cut out.”