Under-promise and over-deliver has been the credo that N R Narayana Murthy has lived by for years. Over the last one year, Infosys has seemingly turned this principle on its head. Infosys, known for its squeaky clean image, is now being accused of opaqueness.
The markets seem to be running out of patience with Infy’s internal issues, which are impacting the company far more than the external environment. The stock opened 10 per cent lower on Friday after its disastrous guidance of 8-10 per cent for FY13. One angry analyst said: “Nearly Rs 1,25,000 crore of investor money is riding on this company, which has been struggling to get its act together for the last two and a half years. It’s time the company spoke the truth.”
Analysts say that there are transparency issues with the company now as there is no clarity on what actually is the problem with the company. Clearly, the sector does not seem to be as “challenging” as Infosys would like the market to believe. Weeks ago Accenture closed its second quarter with a revenue growth of 12 per cent year-on-year in dollar terms. Accenture also increased its guidance for the full year ahead.
In contrast, Infy’s dollar revenue guidance of 8-10 per cent for FY13 stands out like a sore thumb. The company, which is known to beat its own guidance, is not even likely to grow at par with the industry even in the current fiscal. For Q1 FY13, the company has guided for muted sequential revenue growth of 0-1 per cent. The bad news does not end here. Even if one presumes that the company will grow at 8-10 per cent, sequentially the company needs to grow revenues between 2.6-3.2 per cent to meet the lower and upper end of the guidance. The first quarter highlights the pressure on the company’s guidance. Infosys has called the fourth quarter a “challenging” one and from the look of it, the first quarter isn’t likely to be any better.
Analysts say the company is no losing its nimbleness in the market place and that its insistence on holding on to its high-margin model is impacting business growth. Over the last few quarters, analysts believe that a few big clients have not renewed deals with Infosys in the BFSI vertical. In Q4, the BFSI vertical has witnessed a decline, which according to the company is due to some clients not ramping up.
So what did the company do in the fourth quarter? For starters, the dollar revenues fell 1.9 per cent sequentially and increased 10.5 per cent annually to $1.77 billion. Sequentially Infy’s EBIT margins declined 130 basis points, however, compared to the same period in the previous year margins have expanded by 90 basis points to 29.9 per cent. Analysts at Spark Capital say that revenues for the quarter are below consensus expectations. Sequentially too, the company’s revenues have fallen by 1.9 per cent. Volume growth challenges also seem to persist in the fourth quarter with IT services and consulting volumes declining 1.5 per cent sequentially. Spark Capital says it was expecting a volume growth of 0.8 per cent sequentially.
The market is expected to downgrade Infy's premium valuation by pruning its P/E multiple. Clearly, the worst is not over from the stock price point of view.