Infy's FY15 revenue growth forecast may not top 11%

Reacting to CEO's comments, analysts say company might lag peers in FY15

With Infosys painting a gloomy outlook towards the fag end of FY14, experts believe the company might lag the broader sector and its FY15 revenue forecast might be lower than in the previous year. Infosys is expected to peg its revenue growth for FY15 at less than 11 per cent, against its forecast of 11.5-12 per cent FY14.

In an interaction with investors on Wednesday, managing Director and Chief Executive Officer S D Shibulal said the company continued to see weakness in client spending through the January-March 2014 quarter, adding it might be able to meet only the lower end of its revenue growth forecast for FY14. He had also said the company was seeing “unanticipated project ramp-downs and cancellations” this quarter and these might continue in the “initial part” of the next financial year (FY15), too.

Indian bourses reacted sharply to the comments, with the company stock falling 8.54 per cent to close at Rs 3,357.5 on BSE on Thursday. This pulled the sectoral index down about four per cent on a day when the market closed nearly flat.

Analysts said according to back-of-the-envelope calculations, if Infosys recorded only 11.5 per cent revenue growth for FY14, the sequential decline in the fourth quarter of FY14 would be of 0.3 per cent.

“With a weaker base, the FY15 revenue is likely to grow 10.2 per cent, against Street expectations of 15 per cent and our estimate of 14.5 per cent,” brokerage Ambit Capital said in a note published on Thursday. “Even if one assumes flat margins, growth in FY15 earnings per share is unlikely to be about 11 per cent, against the consensus estimate of 20 per cent growth.”

Brokerage Prabhudas Lilladher said for FY15, Infsoys “will find it difficult to guide more than around 11 per cent year-on-year growth for dollar revenue towards the upper end”.
 

For FY15, Nasscom has pegged overall growth in the sector at 13-15 per cent, far bullish than its expectations through the past few years. Also, most information technology services companies have said FY15 will be better compared to FY14, owing to a revival in demand and improved spending by clients.

“Even if we assume 100-basis-point organic growth acceleration for Infosys in FY15 over FY14, it would imply 10.6 per cent dollar revenue growth, short of Nasscom’s guidance of 13-15 per cent for FY15. It could lag the growth of another industry laggard, Wipro,” Ambit Capital said.

Some analysts say Shibulal’s comments reflected Infosys was yet to record a turnaround and continued to face company-specific challenges. These fears stemmed from Shibulal’s remark that some of Infosys’s clients had seen a slowdown in their businesses and such cases were being recorded across verticals. “We have also seen some challenges in skill mismatches between the skills clients need and the ones we have, which have led to a slowdown in ramp-ups,” he had said.

Ambit Capital said recent senior management-level exits had hurt the company’s customer relationships and “persistent overall attrition has potentially hurt delivery (the skills mismatch the company referred to)”.

Analysts said Executive Chairman N R Narayana Murthy’s continued denial of any impact of the senior-level exits from the company was a concern and could lead to a de-rating of the company stock.

However, some remain optimistic, believing Infosys has a history of “under-promising and over-delivering”. Analysts said, the steep fall in Infosys' share price is only a "knee-jerk" reaction and the stock would remain strong in the medium-term.

"For the longer term, management said the company remains focused on revenue growth and aspires to achieve growth rates ahead of the industry with industry leading margins," Barclays Plc said in a note. "Although the stock could react negatively due to near-term weakness, we retain our overweight rating."

Brokerage firm Prabhudas Lilladher also said that it expects several initiatives taken by Infosys to start yielding results in the second half of FY15.