Infosys growth estimate could take RBS heat

Analysts peg likely revenue loss at $70-80 million for FY17 due to setback from Royal Bank of Scotland

A month back, Infosys surprised the market by lowering its revenue growth forecast for FY17. Even as markets had started to live with it, headwinds such as Brexit have created extra challenges for Infosys.

The IT (information technology) firm will feel the heat of Royal Bank of Scotland’s decision to shelve its plans of separately listing William and Glyn as a bank in the UK. Apart from the fact it will have to redeploy/remove 3,000 employees following this development, Infosys’s FY17 revenue growth forecast could be cut again, fear analysts. A large part of the multi-year euro 300-million deal was to be serviced by Infosys.

“This planned ramp-down would likely impact Infosys' FY17 estimated revenue growth by 0.5 per cent, making it increasingly difficult to achieve the requisite compounded quarterly growth rate (3.0-3.9 per cent) in the remaining three quarters to meet the FY17 forecast," says Dipesh Mehta, analyst at SBICap Securities.

Data show Infosys has reported 1.1 per cent to 6.9 per cent sequential growth in constant currency revenues in the past five quarters, the average being 3.2 per cent.

On the other hand, Manik Taneja of Emkay Global says his calculations imply a revenue loss of $70-80 million (or 70-80 basis points (bps) impact on Infosys' revenue growth forecast) in FY17 and $150-200 million in FY18.

Notably, Infosys had missed the Street’s revenue estimates in the June 2016 quarter (Q1) and subsequently toned down its full year constant currency revenue growth forecast to 10.5-12 per cent versus 11.5-13.5 per cent given earlier. Slowdown in the consulting and system integration segment, which forms about a third of its revenue, was a key sore point. Now, as Brexit starts impacting near-term demand for IT, it has raised the risks to revenue growth for Infosys and its Indian peers.

  Following the development, the Infosys scrip corrected 1.2 per cent to Rs 1,050.95 on Tuesday. This follows the near 10 per cent beating the stock has witnessed post weak Q1 show. Currently, it is trading close to its 52-week low of Rs 1,012.25.

A key supporting factor for the stock is that analysts continue to like the company, given that it has shown steady improvement in its growth over the past few quarters (prior to Q1 FY17) and has a relatively lower exposure than peers to the UK and Europe markets.

While the near-term volatility is likely remain elevated, investors with a long-term horizon can consider this stock post the fall.