Growth Is The Only Option: Infosys

Infosys announced its Q4FY13 results earlier today. The result was a disappointment on every possible front, leaving the stock prices of Infosys to plummet through the day and closed lower by a hefty 21.33% at Rs 2295.45 per share. This has also weighed heavily on the markets, which have traded lower by more than 1% throughout the day.

Infosys missed its yearly revenue guidance of 6.5% for FY13 by posting growth of 5.8%. Slower deal ramp-ups and pricing decline were quoted as the reasons for this slowdown. In Q4FY13, revenues of Infosys grew at a mere 1.41% to USD 1,938 million. The operating profit took a massive hit having declined by 6.92% to USD 457 million, making the operating profit shed 211 basis points to reach 23.58%.

Overall, volumes growth stood at 1.83% on a sequential basis. However, pricing declined by 0.7%, affecting overall growth. Infosys CEO SD Shibulal said that pricing has been difficult, particularly in the case of application development, application maintenance and infrastructure management services. These 3 areas contribute to more than 40% of Infosys’ revenues and thus a substantial impact was obvious.

In terms of geographies, revenues were flat from the US, having sequentially grown by 0.08% in Q4FY13. Performance in India was robust, wherein revenues grew by 10.63%. In terms of verticals, healthcare outperformed having grown by 28.46% sequentially.

Apart from the result being disappointing, Infosys’ outlook for FY14 too dragged on the company. It has forecasted revenue growth of 6-10% for FY14. This is lower than NASSCOM’s forecast of 12-14% for the same period. Moreover, Infosys did not give any EPS guidance.

With the onset of FY14, there have been several reasons that have been hindering the company’s ability to forecast short-term profitability. The recent compensation increase, dues left on the payment of the Lodestone deal, lesser conversion of visa applications leading to higher costs on account of increased subcontracted resource usage and the comparatively lower margins fetched by Lodestone have been some of these reasons, thus leading to Infosys discontinuing the EPS guidance.

The environment has dragged significantly recently and pricing has been tremendously pressured in the case of commoditised business. However, the management expects higher discretionary spending to add support to the situation. Growth is the only option and Infosys cannot compromise on investments, said Shibulal.

Due to the above reasons, we expect a short-term pressure to continue to weigh on the performance of Infosys. However, with Infosys 3.0 in place, the company is making structural changes that will enable it to bounce back in the medium-long term.