Nothing could save the IT bellweather from collapsing on Thursday morning as the company failed to deliver upon its own guidance yet again. The stock opened 9 per cent down as revenues contracted and the revised guidance on rupee EPS failed to impress despite a weak rupee. Though the first quarter of FY13 saw volumes grow by over 2 per cent, this failed to flow into revenues due to cross-currency turmoil. Given its high margin profile, the company is facing pricing pressure as there are “sporadic price renegotiations”. Analysts expect this to gain momentum over the year.
This turmoil is largely because the company is changing its revenue mix. Flipping a company’s business model and changing the revenue mix is never easy. So it’s not surprising that Infosys is struggling to meet its guidance quarter after quarter as it seeks to shift the company’s revenues away from the commoditised application development and maintenance to high-margin segments like consulting, package system integration and product platform solutions. Analysts say that it’s a dangerous strategy the company is adopting by refusing to grow the application development and maintenance business, which contributes over 60 per cent of its revenues. This shift in strategy is reflected in the company’s dismal performance quarter after quarter.
The pain is not yet over. The company has revised its FY13 revenue growth guidance down from 8-10 per cent to merely 5 per cent. This will imply a three per cent sequential growth for the next three quarters, which may be challenging as the first quarter is the strongest and in this period the company’s revenues have contracted. After guiding to grow top line between 0-1 per cent in the first quarter and 8-10 per cent for the full year, Infy’s revenues have contracted sequentially by 1.1 per cent to $1,752 million. Even though volumes have grown by 2 per cent, this is not reflected in the revenue growth due to impact of cross currency fluctuation and pricing pressures. With the rupee depreciating by 9.7 per cent in the first quarter, margins should have moved up by at least 400 basis points but this has not happened.
Typically, for every one per cent fall in the rupee, margins expand by 40 bps, therefore, this quarter margins should have moved by 4 percentage points. Instead, the company’s margins have contracted by 190 basis points to 28 per cent. Analysts say this is a huge negative as it indicates that pricing pressures are emerging. This has also resulted in the rupee EPS being revised upwards only marginally to Rs 166.46 from Rs 161.40, which was the top-end of the earlier guidance. Going by the rupee depreciation, analysts were expecting a rupee EPS of Rs 185-190 per share.
Given that among all players, Infosys has the highest margin profile, pricing would collapse sooner or later. Shibulal acknowledged that there are some sporadic renegotiations that are happening, however, the management is hoping that going forward, the platform strategy will prevent further price erosion.
Infy’s CEO D Shibulal says he is running a marathon race and that it’s a conscious strategy the management has adopted for the long-term. Critics say that it’s difficult to comprehend what the company is attempting to do and that too in a very difficult environment. Analysts say the company has taken a conscious decision not to grow application and maintenance business, which contributes 60 per cent of its total revenue mix. Going forward Infy expects segments like products solutions and systems integration to have a higher share in the revenue mix as they have high revenue productivity.
