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Corporate Jul 9, 2012

Why Infy is likely to cut its revenue forecast on 12 July

Uncertainty about spending by US and European clients in a weak global economy will likely weigh on the earnings of Indian outsourcers, dampening hopes that demand will pick up in the second half of the year.

India's $100 billion-a-year information technology and back-office outsourcing industry earns about three-quarters of its revenues from customers in the United States and Europe.

Analysts expect No.2 ranked Infosys the only top-three vendor to provide a full-year forecast, to pare its revenue growth estimate for the current fiscal year to as low as 5 percent when it posts quarterly earnings on 12 July.

The company in April had forecast 8-10 percent growth for the fiscal year ending March 2013, already disappointing investors enough to cut 13 percent of its market value on the day. It has gained about 2 percent since.

Reuters

The National Association of Software and Service Companies, or NASSCOM, the industry lobby, expects the industry to grow exports by 11-14 percent in the current fiscal year that ends in March.

Customers continue to hold back discretionary spending due to the extended euro-zone crisis and the absence of unequivocal data that an economic recovery is under way in the United States, the Indian providers' biggest market.

"Hopes of a recovery in the second half are just that, hopes," said Apurva Shah, head of research at BNP Paribas Mutual Fund, which manages investments of about $750 million, including in the top Indian IT companies.

Due to the continued uncertainty in the demand environment and discretionary spending not coming through, the fund was "underweight" on the sector, Shah said.

FADING FAST

The sluggish global economy is prompting clients to demand more for every dollar spent. This adds to the pressure on billing rates on a commoditised set of services that Indian firms, competing with Accenture and IBM rely on for the bulk of their revenues.

"The depressed situation in the west appears to continue to be of concern, but the hope is that they will recover slowly," Tata Consultancy Services Chairman Ratan Tata said at the company's annual shareholder meeting on 29 June.

Shares of Infosys, which has a market value of about $25 billion, are down about 11.5 percent this year, while those of top-ranked TCS are up about 8.7 percent. By comparison, the Sensex has gained about 13 percent.

A weaker first half may have been factored in by the street, but "hopes for recovery in 2HFY13 are fading fast," Bhavin Shah, chief executive of Equirus Securities, said in a 2 July report. He has an "underweight" rating on the IT sector.

For the June quarter, analysts expect little or no sequential dollar-term sales growth for Infosys. The company may say sales grew 0.5 percent, Deutsche Bank analyst Aniruddha Bhosale said in a note. Bhosale, who advises clients pick TCS, expects it to report sequential growth of 2.6 percent.

Infosys is seen posting a profit of Rs 23 billion, compared with Rs 17.2 billion a year ago, while TCS is seen coming in at Rs 29.7 billion, 23.3 percent more than the year-earlier period.

The companies are expected to benefit from an 8.5 percent fall in the rupee during the quarter. However, analysts see some negative cross-currency effect due to the move in the euro and British pound versus the U.S. dollar.

"The rupee depreciating is not a reason good enough to play these stocks, as the outlook in terms of overall demand remains weak," Apurva Shah said.

Reuters


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