Why Infosys Q4 results are a major disaster

IT major Infosys today disappointed investors with its subdued revenue growth outlook despite posting a 3.3 percent increase in its consolidated net profit to Rs 2,394 crore for the fourth quarter ended March 31, 2013.

Revenue Guidance miss: For 2012-13, Infosys revenues grew 5.8 percent against a forecast of 6.5 percent growth. Infosys CEO SD Shibul said the miss was on account of slower deal ramp-ups, pricing decline and adverse cross-currency impact.

The company said it expected 2013/14 revenue to grow 6-10 percent, lower than market expectations of a 12 percent guidance, and added that global economic uncertainties remain challenging for the industry. The guidance is particularly bad considering the IT body Nasscom’s projection of 12-14 percent growth for the sector. Also considering that Infosys’ guidance includes contribution from Lodestone, the Zurich-based management consultancy firm it acquired in Sept 2012, this is a huge disappointment. If one excludes Lodestone, forecast will be even lower.

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Further, the lower-than-expected FY14 guidance reflects the uncertain macro environment and the pricing pressure which the company is experiencing.

“Infosys is experiencing delays in decision making by clients and also delays in ramp-ups. The lack of stronger revenue growth despite the pressure on realisations which the company is facing in the non-discretionary space, is concerning. We expect the stock to remain under pressure,” said Dipen Shah, Head of PCG Research, Kotak Securities.

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“Infosys results are a disaster. FY14 revenue guidance 6-10% growth, shame they didn’t do away with this. I reckon a large part of the adjustment has already happened today itself,” CLSA said in a note.

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K.K. Mital, CEO for portfolio management services at Globe Capital, was quoted by Reuters as saying that Infosys’ guidance appears to be a company-specific problem. “Even mid-cap companies are expected to perform better than this.”

NO EPS guidance

Secondly, speculation that Infosys might do away with guidance may not have been completely off the mark, as the company has not given any earnings guidance. This may imply that the company does not yet have a firm handle on its margin trajectory.

“The company has not even given EPS guidance for the year, and has continued with not giving out quarterly guidance, something it started in 2QFY13. Thus, quality of guidance and extent of “information asymmetry” that the company seeks to address when giving out guidance, has clearly worsened,” brokerage Nirmal Bang said in a report.

According to brokerage JP Morgan, Infosys has disappointed on all counts and the dismal quarter has again raised the question whether Infosys’ turnaround story is credible or not.

“Infosys disappointed on all counts -USD revenue growth, operating margins missing, FY14 revenue growth guidance and withdrawal of EPS guidance”, it said in a note today.

Organic growth guidance missed:

Infosys also missed its organic growth guidance of 5 percent for FY13, as revenues for the full year came in only at 4.2 percent, which excluded its Lodestone buy. Brokerage IDFC said most of the incremental growth was driven by Lodestone, the Swiss consultancy which Infosys acquired last year.

Consolidated revenues in dollar terms increased to $1938 million, up 1.41 percent, from $1911 million quarter on quarter, including the Lodestone buy. JP Morgan expects Lodestone to contribute 1.3% points to Q/Q growth; which implies Infosys’ revenues must have hardly grown on an organic basis.

Operating margins disappoint too

Even the companies’ operating margins, a key measure of profitability, fell more than estimated at 23.55 percentdespite modest increase in utilization, which might imply that pricing cuts might be deeper than expected.

“The operating margin of the company declined by 210bp qoq to 23.6%, which is a historically low level for Infosys. Profit was held up and because of higher other income of Rs 674cr as againstRs 503cr in 3QFY2013. This seems that the company is still not out of woods,” said Ankita Somani, analyst at Angel Broking.

Are the staff leaving the ship?

During the quarter, Infosys added 8,990 (gross) and 1,059 (net) employees taking the total headcount to 1,56,688.

From about 17 percent at the end of December quarter, employee attrition has moved up to 20 percent in the March quarter , where as in the rest of the industry attrition has been stagnant or falling.

“Notably, it is the highest quarterly annualized attrition for Q4 in the ast decade. Though, partially the pick-up might be because of the company-specific issues, it probably also points to increased demand for resources from other well-performing companies,” said JP Morgan.

Even the management commentary remained cautious, despite industry outlook improving. In an analyst call, Infosys CFO Rajiv Bansal reiterated that “As we go into Q4, challenges remain.”

The management commentary from industry peers will be important to determine whether the pressure faced by Infosys is company-specific or an industry-wide phenomenon.

The only silver lining seems to be the overall recovery in the US and stabilisation in Europe expected in the second half of this year which may help Indian IT as a whole.