A higher than expected cut in its full year earnings guidance (both in rupee as well as dollar terms), continuing challenges on the demand environment and unstable top management are all indications to the fact that Infosys’ woes are far from over. The optimism surrounding the company appears to be unwarranted. Thus, despite meeting the street’s expectations, the Infosys scrip fell about 8% in the opening session on Friday, as against flattish returns by the Sensex.
On the revenue front, continued stress in Europe as well as on discretionary spending are the two major areas of concern for the company. Interestingly, though both US and Europe grew by 2.2% and 4.7% sequentially respectively, the management continues to witness challenges in Europe. Further, a fall of 15.4% in its India revenues also spells bad news for Infosys. Vertical wise Banking and Financial Services (BFSI) growth was muted at 0.6% sequentially, while manufacturing, retail and energy/utilities grew by 2.8%, 3.9% and 4.1% sequentially respectively. Volume growth though remained strong at 3.8% sequentially.
Notably, its repeat business metric was the lowest since the March 2012 quarter at 98.2%. A look at the client metrics points out some worrisome trends – one of its large clients ($300 million plus) downgraded to a below $200 million bucket. Further, it has lost clients in the revenue bucket of $20-50 million for this quarter.
The sharp contraction (166 basis points) in operating margins surprised the street and was largely a function of higher costs and wage hikes impacted by the company. Infosys gave 6% wage hikes to its offshore employees in the September quarter and plans to give a 2-3% raise in the December quarter to its onsite employees.
As against street expectations of an upward revision in full year revenue guidance, management reiterated the same to 5% growth in dollar terms. This was because the company has not included Lodestone acquisition in the guidance. Infosys plans to do so in the December quarter. The cut in full year rupee earnings of 3% was higher than street expectations of 2% cut. Amidst all these operational challenges, the change in top management is ill-timed believe analysts.
