Bengaluru: Early signs of a turnaround at Infosys Ltd under its first non-founder CEO Vishal Sikka seem to be fading, as the company on Friday cut its full-year revenue forecast for the third time this financial year after posting a 1.4% sequential drop in dollar revenue in the December quarter.
Infosys’s latest revision of its revenue outlook means the management has shaved $588 million off the $1.31 billion in new business it had expected to do this year in April, when it had guided for at-best growth of 13.8%.
Bengaluru-based Infosys was hit by an unexpected loss of business from Royal Bank of Scotland Group Plc., estimated to be about $60-70 million. Negative cross-currency movements also hurt revenue.
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But what is disconcerting analysts and shareholders is that 30 months after Sikka took over the CEO’s role in August 2014, Infosys has struggled to deliver consistent earnings and failed to improve upon its performance of last year.
Despite being a seasonally weak quarter, Infosys struggled to report incremental growth in any of its markets or service lines.
Infosys said revenue for the three months to 31 December totaled $2.55 billion, compared with $2.59 billion in the September quarter. In constant currency terms, revenue declined 0.3% sequentially. Net profit grew 1.5% to $547 million from $539 million in the July-September period. In rupee terms, revenue declined sequentially by 0.2% to Rs17,273 crore, while net profit increased 2.8% to Rs3,708 crore. The company improved its operating margin by 20 basis points sequentially to 25.1% from 24.9% at the end of fiscal second quarter. One basis point is one-hundredth of a percentage point.
A Bloomberg survey of analysts had forecast revenue of $2.55 billion, or Rs17,286.40 crore, in the quarter and a net profit of $524.01 million, or Rs3,557.20 crore, in the October-December period.
Infosys now expects a 1.3% sequential dollar revenue expansion in the current January-March period, which is again less than the 1.6% sequential growth in the January-March period of last year. The company expects to grow between 7.2% and 7.6% in the full year, less than the 9.1% growth last year.
At-best 7.6% growth means Infosys will add $722 million in new business this year, less than the $790 million added last year.
In constant currency terms, Infosys now expects to grow between 8.4% and 8.8% as against its earlier estimate of growing between 8% and 9% for the full year. This is again lower than industry body Nasscom’s top-end projected growth of 8-10% for India’s $150 billion outsourcing sector.
Infosys won $664 million in large deals during the third quarter, significantly down from $1.2 billion in the July-September period and $809 million in the April-June period.
This reversal in fortunes, bit by bit, at Infosys, is making stakeholders, including senior executives and investors, jumpy. Although overall attrition continues to be stable, five executive vice-presidents (EVPs) left Infosys last year, compared with three EVP departures in the first 17 months of Sikka’s tenure (1 August 2014-31 December 2015).
“It is not an easy transformation,” Sikka conceded when asked about the reasons behind the underperformance. “This industry (IT outsourcing) has grown using global delivery model and cheap costs. So the kind of organization and workforce transformation we are doing is a very challenging thing. It is going to take time and it is a lasting change and I’m encouraged by the progress we have made so far.”
Investors on Friday punished the stock, which fell 2.49% to Rs975.15 on the BSE on a day the benchmark Sensex ended little changed at 27,238.06 points.
“The focus for us now is to first record a better Q4, because it helps us with a better exit rate as we step in the next financial year,” a senior Infosys executive said on condition of anonymity. “Our problems in consulting and poor execution in some pockets is well-documented. But now we have to really make sure we do well in the current quarter.”
To strengthen its execution, Infosys promoted S. Ravi Kumar, head of delivery, as deputy chief operating officer. He will work along with U.B. Pravin Rao, chief operating officer.
Infosys’s larger rival, Nasdaq-listed Cognizant Technology Solutions Corp., too, cut its growth forecast thrice and has projected revenue growth of 9% in 2016 (Cognizant follows the calendar year as financial year). Tata Consultancy Services Ltd (TCS), India’s largest software services firm, does not give quarterly or yearly guidance, but after it reported on Thursday a poor 0.3% revenue increase in the December quarter, it will be a tall task for the company to even grow at over 6% in the current year.
“Both TCS and Cognizant too have had a weak year. But unlike Infosys, both have excellent execution capabilities. It is time Sikka and team really deliver on this ‘renew and new’ strategy. Surely, questions are being asked on the company’s strategy after repeated disappointments,” said a Mumbai-based analyst at a domestic securities house on condition of anonymity.
The US, which brings 62% of Infosys’s revenue, declined by 0.6% sequentially, while business from Europe, which accounts for 22.2% of overall revenue, declined 2.5%. Banking, financial services and insurance, which brings more than a third of revenue, declined 0.8%.