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Infosys may trim forecast again as U.S. clients cut back

Employees of Indian software company Infosys walk past Infosys logos at their campus in the Electronic City area in Bangalore September 4, 2
Employees of Indian software company Infosys walk past Infosys logos at their campus in the Electronic City area in Bangalore September 4, 2

By Harichandan Arakali

BANGALORE (Reuters) - Infosys, India's No. 2 software services provider, may cut its revenue forecast next month as U.S. business clients defer spending and balk at signing big deals.

The outsourcing icon, which has missed its own revenue guidance in three of the past four quarters, has struggled as its big customers cut costs, and analysts have criticized management for sticking with a rigid pricing policy when competitors have offered more flexible plans.

Infosys executives have sounded downbeat in recent interviews and in meetings with analysts, citing client troubles ranging from Hurricane Sandy-related shutdowns to worries about the U.S. "fiscal cliff" of tax hikes and spending cuts.

"From what they've been saying in various conversations, it's not unlikely that they will cut guidance," said Ambit Capital analyst Ankur Rudra, who has maintained a "sell" rating on Infosys shares since January 2011.

An Infosys spokeswoman declined to comment, noting that the company is in a mandatory quiet period ahead of its earnings results due in January.

With about 60 percent of its business in the United States, Infosys is particularly vulnerable to swings in U.S. corporate sentiment and has been hit hard by spending deferrals.

Diviya Nagarajan, an analyst at UBS, wrote in a December 6 note to clients that the company's growth forecast for the fiscal year ending in March could be under threat because of cutbacks on large projects and delays in closing deals.

UBS organized an investor meeting on December 6, featuring Infosys Chief Executive Officer S.D. Shibulal.

Longer-than-expected client shutdowns due to Hurricane Sandy, especially in the manufacturing sector, were also hurting Infosys, wrote Nagarajan in her report.

Infosys's guidance of 5 percent dollar revenue growth for the current fiscal year compares with an estimate of 11 percent for the sector by the National Association of Software and Services Companies, or NASSCOM.

Infosys, for years an investor favorite for exceeding its targets, stopped providing quarterly guidance in July after a string of disappointing results. It now provides only an annual revenue forecast.

It is expected to update its outlook for the fiscal year ending in March when it reports quarterly results on January 11. A forecast cut would be the second this fiscal year. In July, Infosys halved its dollar revenue growth estimate from as much as 10 percent - forecast in April - to 5 percent.

LEANING OVER THE CLIFF

Long the sector bellwether, Infosys is in the midst of a strategy shift that it calls "Infosys 3.0" as it tries to diversify away from businesses that have become commoditized. It is focusing on developing its own software and building technological expertise.

At the same time, industry insiders say, it is quietly becoming more flexible on its premium pricing, given fierce competition.

"Things have become challenging, because in the U.S., which is the largest market for all of us, the fiscal cliff is still not resolved, they are still talking about it, there is a lot of uncertainty, so all the corporates are sitting tight on their spending," V. Balakrishnan, who was previously chief financial officer and now heads three Infosys units, told reporters on December 12.

The company is also heavily exposed to discretionary spending in the financial sector. While such business is lucrative during good times, it is vulnerable when the industry is retrenching.

"Previously, the banks would come and talk to us, you know. Now, discretionary projects, they can pull the plug with 48 hours notice," Infosys CFO Rajiv Bansal told Reuters on December 8.

UNDERPERFORMER

Infosys shares are down almost 18 percent this year, compared with a 7 percent gain for larger rival Tata Consultancy Services and a 3.1 percent fall for the sector index. That compares with a 25 percent gain for the broader market.

Some investors are betting the stock will continue to fall. Nearly three-quarters of Infosys American depositary receipts that can be borrowed are out on loan, compared with an average of about 8.7 percent for all ADRs, according to data from Markit Securities Finance.

In the nine months ended September, Infosys's operating profit dropped about five percentage points as a proportion of revenue, from 31.2 percent for the quarter ended December 2011 to 26.3 percent, according to data on the company's website.

Cowen and Co analysts downgraded Infosys to "neutral" from "outperform" on December 3, expecting it to have a "protracted revenue growth recovery."

In a Cowen survey of IT buyers, Infosys scored poorly, behind competitors such as Cognizant Technology Solutions Corp, on both new client additions and project workload, which the analysts define as spending intentions from existing and new clients.

U.S. based Cognizant expects to end the year to December with 20 percent revenue growth.

Infosys's difficulties stand in contrast with commentary from larger rival TCS, which is known to be more flexible on pricing and has maintained that it will beat NASSCOM's estimate this year and that next year will be even better.

Cognizant and India's HCL Technologies have also been winning market share by being more flexible on pricing, which puts more pressure on Infosys at a time when customers are hesitant to add new spending.

"While the net new scope of work hasn't been increasing greatly, a large number of contracts of significant value are coming back to the market as renewals or recompetes," said Siddharth Pai, partner at Information Services Group, which advises global clients on outsourcing strategies.

"Our data suggests that incumbents win these contracts the majority of the time, but each renewal constitutes an opportunity for a rival to displace the incumbent," he said.

(Additional reporting by Nishant Kumar in Hong Kong; Editing by Tony Munroe and Emily Kaiser)

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