Infy stock plunges 21% on forecast Q4 Net Up 3% At 2,394Cr, Margins Drop As Tech Co Reduces Prices

Bangalore: Over two successive trading days in January, Infosys's share price rose by more than 20% soon after it announced betterthan-expected results for the December quarter. Every bit of that positivity was wiped out on Friday with Infosys's March quarter revenue growth falling below analysts' expectations. The company's revenue growth forecast of 6-10% for 2014 fiscal, significantly below Nasscom's estimate of 12-14% for the IT industry, made matters worse. Its share price plummeted, closing 21% lower on Friday.

    The fourth quarter sequential dollar revenue growth of 1.4%, at $1,938 million, was also way below over 3% predicted by some brokerage firms. 
    "Our performance is a reflection of the volatility in the environment," said Infosys CEO S D Shibulal. 
    A major reason for the slower growth was lower pricing, which dropped by 0.7%. "Clients are going through a struggle and they are most focused on costs. And there is more competition in the market," Shibulal said, explaining the need to reduce prices. Thanks partly to this the operating margin also took a heavy hit of over 200 basis points. Shibulal said the pressure on margins would continue for some time also because of charges related to the acquisition of Swiss consulting company Lodestone, the single-digit margins that Lodestone has and the compensation increase given to Infosys employees in the second half of last year. The company has decided not to provide a margin and EPS guidance for the fiscal 2014 because of uncertainties around pricing. 
    The problems, however, appear to be company specific and this was reflected in the stock market reaction on Friday. TCS and HCL Technologies' share prices dropped by less than 2%, and Wipro's by 4.7%. 
    "Continued weak guidance (by Infosys), even in the context of firming economic indicators globally and especially in the key US market, is a significant cause of concern," said Partha Iyengar, country manager of research firm Gartner India. 
    Bhuvnesh Singh, head of India research at Barclays, said that with Infosys's spotty record of the past three years, its confidence in their guidance and visibility remained low. 
    "We note that Infosys's commentary remains at odds with TCS, the bellwether of the sector. TCS maintains that FY14 could be a better year than FY13 and has strong confidence in their March quarter performance. Clearly, Infosys's problems are more company specific and it would need to do a lot of heavy lifting to keep their market share from sliding," he said. 
    Consulting & systems integration constitutes almost 32% of Infosys's revenues, almost double the average for the industry, and is a segment that comes under pressure in economic downtimes with clients unwilling to spend on new transformational IT projects. Asked about the absence of any movement in the proportion of revenues from the products & platforms space, which has been fluctuating between 5.5% and 6% for long, Shibulal said a significant movement could only come from an acquisition and the company was actively looking for one. 'We are staying the course on strategy' Volatile Environment, Lower Consumer Confidence Slowing Growth: Shibulal 
    Infosys on Friday gave a revenue guidance for 2013-14 fiscal that is lower than the industry average, plunging its stock price by 21%. CEO S D Shibulal spoke to TOI about the challenges the company is facing. Excerpts… 
Why is Infosys's revenue guidance lower than the 
the industry average? 
The US economy was poised for some kind of recovery. But if you look at the latest PC sales report, it has dropped 15% sequentially. This indicates lower consumer confidence. We continue to live in a volatile environment. Also, Infosys has nearly 33% of its revenue coming from consulting and package implementation; the industry average is 17-18%. This space is dependent on discretionary spends and that has taken a hit in these volatile times. 
Revenue productivity has dropped 0.7% in the January-March quarter. Why? 
Revenue productivity depends on pricing and portfolio shifts. Last quarter the problem was pricing pressure. Clients are predominantly focusing on reducing costs especially in sectors like financial services. 
Are you looking at any strategic shifts to get growth back? 
We will continue to focus equally on all our three engines of growth — business IT services, consulting and package implementation, and products and platforms. 
What acquisition options are you considering in 
products and platforms? 
In products and platforms, we are not trying to build the next ERP product to compete with SAP or Oracle. We are focusing on what we call white spaces, where there's virtually no other player. The digital consumer and emerging markets categories are good to bet on. Target acquisitions must fill gaps in one of these areas. But the issue is to figure out the right valuation; valuations tend to be high in hot areas. 
You have established a $100 million innovation fund for products and platforms. What's the idea? 
Someone in Infosys may come up with an idea that may not quite fit into our portfolio, but we may want to spin it off and fund it because we think it's promising. Or there may be an external person who we think has a great technology that could be capitalized and rolled back in the organization at a later date to execute our Infosys 3.0 strategy. The plan is to fund such initiatives.

S D Shibulal | CEO, INFOSYS