Infy sees dark clouds over FY10 revenues

A 29% rise in FY09 net profit failed to bring cheer as India’s 2nd-largest software exporter forecast its first dip in annual dollar sales due to the meltdown

 WHEN top officials from Infosys Technologies met executives at the company’s biggest customer BT a few weeks ago in London, the mood was sombre. BT, Britain’s biggest phone company, had been posting losses for some time due to lower demand for key products and large writeoffs. BT officials were concerned that their costs were too high and demanded lower billing rates when the contract with the Bangalore-based tech giant came up for renegotiation.
    Infosys was hardly in a position to complain. BT was its biggest client, contributing about 6.9% to revenues. After much haggling, the two agreed on a 20-30% cut in billing. As Infosys executives prepared to board flights back to India, they could not escape the conclusion that they will have to go through many such similar scenarios in the weeks and months ahead.
    The collapsing economies of the West, shrinking IT budgets and the spectre of deep recession in the US are haunting many Indian tech companies, long used to a steady stream of lucrative orders and contracts. On Wednesday, Infosys, India’s technology bellwether, became the first company to underline the domestic IT industry’s vulnerability with a disappointing forecast of a fall in revenue and earnings in dollar terms for next year.
    “This amount of uncertainty today is unprecedented. One of the worst periods we have ever seen. We hope that it does not happen again in our life time,” S Gopalakrishnan, CEO and MD Infosys, told a press conference. For the next year ending March, Infy said it expected revenue in dollar terms to fall by 6.7-3.1% to $4.35-4.52 billion. This is the first time in its history that Infosys has forecast a fall in revenue for the ongoing year. Infy numbers big setback for IT sector
    BETWEEN Accenture and Infosys, we are talking a ‘no growth’ situation — it seems that the demand environment is worsening because of challenges being faced by the top outsourcing customers,” James Friedman of Susquehanna International Group, a US-based financial brokerage firm told ET from New York.
    Infosys shares fell 2.70% to Rs 1,370.80 after the results, despite an over 300-point gain for the Sensex. Infosys shares have sharply outperformed the rest of the industry in the past one year, with its shares falling 9.27% compared with a 35.29% fall for the BSE tech index.
    The results, though not completely unexpected, will come as a big disappointment for the IT industry struggling with high staff costs, lower billing rates and prospects of a steep fall in orders. Infosys’ full-year (2008/09) results were more or less on par with its strong performance in the previous years (revenue grew 30% year-on-year to Rs 21,693 crore, while profit jumped 28.5% to Rs 5,988 crore), but the attention was fully focused on the company's guidance.
    "The velocity of growth has slowed down, and the amount of uncertainty today is unprecedented,” said Mr Gopalakrishnan. “While most of the contracts are worth $200 to $500 million at the beginning of discussions, they become smaller with the customers inviting more vendors (at least three) in order to get more competitive rates," he added.
    Already, analysts are factoring in lower growth rates for Tata Consultancy Services and Wipro, the other two components of the Indian tech trinty. TCS, which reports on April 20, is expected to post a slower revenue growth of 18% 2008-09 compared with a 21% growth in the previous year.
    These are tough times for the Indian IT industry, especially for Infosys. Over half of Infosys' customers see a revival only beyond March 2010. Almost 89% of the company’s top customers have lowered their IT budgets while around 69% of large customers are set to lower their spend to double digits.
    Outsourcing customers are using the downturn as an opportunity to question high margins of Indian service providers. Top five Indian software companies renegotiated almost $1.5 billion worth of outsourcing contracts since September last year at around 15% lower rates.
    “Discounts are being considered investment in these challenging times, as vendors such as Infosys seek to retain their top customers over the long run,” a UK-based expert familiar with BT's outsourcing decisions told ET on conditions of anonymity. The tech industry has largely relied upon its skilled workforce, which cracks code at half the rates charged in the west, will have to completely reinvent itself to survive and emerge stronger.
    According to Sabyasachi Satyaprasad of Mindplex Consulting, while over $4.5 billion worth of contracts be come to India this year, Indian providers will lose almost $300 million because of lower rates.
    Over the past two quarters, customers such as Visa, Best Buy, Applied Materials, Nissan, Citibank and Bank of America have been in discussions with India-based service providers, asking them to help these companies cope with lower information technology budgets.
    Infosys’ pricing for the quarter ended March 2009, declined by almost 3%, the company said. And for the ongoing year billing rates are expected to drop by almost 6.5%, V Balakrishnan, chief financial officer.
    To cope with a dramatic slowdown, Infosys has embarked upon a series of initiatives to cut costs, hardsell itself in the domestic market and spruce up its sales and marketing efforts in the west. Infosys executives are adamant that they want to maintain margins between 29-31% going forward. Despite the challenges and threats of a serious fall in billing rates, Infosys executives are unwilling to give up on what they see as their gold standard.
    “Margins are easy to give up but difficult to get it back and in the past we have walked away from deals which do not meet our financial parameters,” said Mr Balakrishnan. In the coming months, Infosys will freeze salaries, slash variable pay and moving more work offshore. The onsite salaries are double that of offshore salaries.
    Infosys, which competes with MNC rivals such as IBM, Accenture and HP-EDS apart from other Indian tech firms including TCS and Wipro has increased the proportion of fixed price contracts in order to cope with pricing pressures. The company had almost 35.4% of its projects being delivered under fixed-price model, up from around 31% a year ago.
    But will this be enough? Infosys declined to disclose the savings to be generated from these moves but even if they come through, there are bigger dangers lurking. The travails of BT Group Plc is just one of them. Infosys' BT revenues could be down to almost $300 million, from around $380 million last year, according to an outsourcing expert who requested anonymity. Britain's biggest phone firm is currently restructuring its BT Global Services (BTGS) unit, which accounts for almost half of Infosys' BT revenues.
    In a worsening economic environment, customers such as BT are also asking their vendors to give up on the premium rates for some of the niche projects, impacting average billing rates for the total outsourcing contract.
    “BTGS’ performance could have a significant impact on Infosys’ growth expectations for FY10E,” Diviya Nagarajan, an analyst at Mumbai-based JM Financial wrote in her report earlier this year. BT, which accounted for almost 9.1% of Infosys' revenues last year, will contribute around 6.9% of the company’s business this year, down over 2%, Ms Nagarajan added.
    “Many of our clients are impacted by the financial crisis and are looking to us to help them reduce their expenses and optimise their businesses,” said Mr Gopalakrishnan.
    There are silver linings for Infosys and investors in the 2008-09 numbers even if all of them were not visible in the brouhaha over the poor forecast. For one, Infosys continues to add high quality clients. The firm added 37 clients in the fourth quarter. Its cash hoard is impressive and is getting bigger. At over $2 billion, it is perhaps enough to insulate the company from unforeseen contingencies.
    Fortunately for Infosys, India’s domestic software services market continues to show growth with several government and stateowned organisations seeking to award up to $3 billion worth of contracts.
    “We see a pipeline of almost $1 billion from the domestic market in the coming years — we are very serious about our India business,”added Mr Gopalakrishnan.
    “Infy will likely enjoy tailwinds from currency and abundant labor supply to fortress margins, and the unfortunate circumstances at Satyam may lead to customer conversion (Telstra has been in the headlines this week), but it may be hard to grow around potential declines in the top customers,” Mr Friedman added.
    Investors have long known that Infosys' guidance estimates are on the conservative side. As they trooped out of the conference call after 3:00 pm, many of them were hoping that the company was once again leaning on the side of caution, relying on some statements by senior executives.
    “There are some signs that financial services recovery has started to happen,” said Mr Gopalakrishnan. “Guidance is a realistic assessment as of now. If things change tomorrow, we could look at a revision,” Mr Balakrishnan told ET.

 

 

 

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