In April this year, Infosys had predicted revenue growth of 11.5-13.5% in constant currency. That forecast was pared to 10.5-12% in July and, as the second quarter progressed, the company said it would likely have to cut its target again.
Infosys now expects revenue to grow 8-9% in constant currency in FY17. The National Association for Software and Services Companies has said it expects the industry to grow 10-12% in constant currency this fiscal, though industry experts expect that target to be cut as well. “We have said that our way of giving guidance is saying it as we see it. This is what we expect.
We executed well in the second quarter, but given the growth in the first half and what we see looking ahead, we decided to cut the guidance,” Chief Executive Officer Vishal Sikka said in a post-earnings press conference.
Though Infosys shares closed down nearly 3% in trade on Friday as investors were disappointed with the magnitude of the guidance cut, some analysts said it had to be viewed as part of the broader issues affecting the industry.
Shares of Infosys closed 2.5% lower on the National Stock Exchange. They opened 5.5% down on NYSE.
“I am not disappointed with the outlook. It is in line with what we expected based on the macroeconomic environment and read-throughs of commentary from their clients,” Sagar Rastogi, an analyst with Ambit Capital, told ET.
Infosys’ results follow larger rival Tata Consultancy Services’ disappointing quarterly announcement on Thursday.
TCS’ revenue missed analyst expectations by a wide margin and growth was at the slowest pace in over a decade, as clients in banking and retail held back spending. But TCS’ operating margin perked up by 95 basis points, and its shares ended trading 1.8% higher on NSE.
FY17 is likely to go down as one of the worst for the Indian IT industry as it grapples with outcome of the UK voting to leave the European Union, impact of automation and digital technologies, and pricing pressure in its traditional business.
Dipen Shah, a senior vice-president at Kotak Securities, said that apart from cancellation of a large contract from Royal Bank of Scotland, Infosys has attributed the guidance revision to internal restructuring of service lines and an uncertain macroeconomic environment, indicating that most negatives are factored in. “We believe that there are tailwinds which can provide positive surprises,” he said.
Concern over BFSI
Analysts had been particularly concerned about spending by banking and financial customers, the industry’s largest clients by revenue. TCS’ BFSI revenue, which accounts for over 40% of the total, grew just 1.2%. Infosys’ BFSI revenue outperformed that by a considerable margin — growing at 5.2%.
For the quarter ended September 30, Infosys revenue grew 3.9% sequentially in constant currency to $2.58 billion. Net profit was up 5.5% sequentially to $539 million. Analysts had factored in growth of about 3.5% in constant currency. In rupee terms, revenue grew 3.1% to Rs17,310 crore and net profit was Rs3,606 crore.
“We feel while the market is tough for traditional services, client uptake for emerging technologies and digital is decent. Clients are ready to buy specific business functionality, but in new formats. Indian firms able to crack that model are showing growth,” said Sudin Apte, CEO at consultancy Offshore Insights. The Bengaluru-headquartered company also expanded its operating margin 80 basis points to 24.9%, helped by a 200-basis-point improvement in utilisation rates. Excluding trainees, Infosys’ utilisation jumped to 82.5%.
But Infosys narrowed its margin band for FY17 to 24-25%, from its previously stated band of 24-26%.