Infosys at risk of losing its bellwether position?

Is Infosys’ weak revenues the result of company-related issues or sector specific?

The tech company’s shares lost 1.5 percent to Rs 2,365 today, extending losses from a 13 percent plunge on Friday after a slew of analysts downgraded the stock following its lower-than-expected revenue growth outlook on Friday.

[caption id=“attachment_276831” align=“alignleft” width=“380” caption=“The tech company’s shares lost 1.5 percent to Rs 2,365 today, extending losses from a 13 percent plunge on Friday. AFP”]  [/caption]

Infosys projected revenues to grow by just8-10 percent against 11-14 percent estimated by industry body Nasscom. That led investors to believe that the weaker outlook is probably due to company-specific reasons.

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What’s worse is that the company failed to meet even the lower end of its dollar revenue guidance, which it cut twice during the financial year 2012. At the beginning of the financial year 2011-2012, Infosys said its revenues would grow by 18 to 20 percent; later, that was lowered to 16.4 percent. Then, in January, the company further revised its guidance for the fourth quarter by another 3-7 percentage points against what it had forecast in October.

Eventually, the company’s revenue fell short by 3 percent in the March quarter against the guidance it had issued in January.In fact, the company missed its quarterly guidance in the past two quarters.

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For the current financial year that started on 1 April, the company has forecast revenues will be between $7,553 million and $7,692 million, an annual growth of 8-10 percent.

So why such a low projection of revenues? “When you are coming out of a tough year, and a tough quarter, it is natural to build in some conservatism,” said Infosys CFO V Balakrishnan, arguing that the guidance given is the result of a volatile environment but is ‘ very realistic.’

Given the challenges the company faces in achieving even single-digit growth - slowing US growth and continuing problems in Europe, its two key markets - investors are not sure the company will be able to meet the new target. That’s what prompted investors to dump share on Friday, noted a Mint report. “In short it has missed already-low expectations by a big margin,” it said.

With an anemic growth forecast, the IT bellwether not only faces the risk of losing its prime spot in the IT industry but also risks of being overtaken by aggressive rival Cognizant as the second-largest software exporter, whichhas forecast 23 percent growth in the year to December 2012. The fact is if Cognizant meets its own guidance for the first quarter, its revenues will come very close to that of Infosys. “For the quarter ending March 31, 2012, Cognizant has given a revenue guidance of $1,700 million, which would be just $70 million short of Infosys’ March quarter revenues,” said a Business Standard article.

“Other than the mortification of losing its place in the software industry’s pecking order, Infosys’ underperformance could mean that it risks losing the confidence of investors and analysts who could question whether the management has a coherent strategy that is capable of delivering growth while protecting margins,” a Times of India article noted.

“Mishaps on the HR front, a protracted re-organisation and continued operational slip-ups, all in the past 18 months has invariably raised the bogey of Infosys is losing its magical operational excellence,” said CLSA in its report.

Deutsche Bank said Infosys’ rivals Tata Consultancy Services and Wipro were “best positioned to deliver value” given clients in the sector are facing budget constraints on their spending.

CLSA downgraded India’s No.2 software services exporter to underperform’ from ‘outperform,’ with a 12-month target price of Rs 2,630. Meanwhile, Deutsche Bank cut the stock to ‘Hold’ from ‘Buy’, with a revised target price of Rs 2,400 while Macquarie also downgraded the stock to “Neutral”, but with a target price of Rs 2,450.