Battered Infy sticks to 19-21% sales forecast

Infosys Technologies, India’s second-largest information technology (IT) services exporter, is cautiously optimistic on demand from the troubled economies in Europe and the United States and is sticking to its earlier growth projections, at least for now.

In an interaction with analysts on Thursday, the Infosys management said it is yet to see a deterioration in demand after the S&P downgraded the sovereign rating of the US, though the customers are more cautious and are preferring to take short-term decisions.

On Friday, IT stocks fell more than 4% on the Bombay Stock Exchange — the second consecutive day of decline. On Thursday, too, IT stocks had led the market fall following a sector downgrade by foreign brokerage BNP Paribas Securities, which said the worsening macroeconomic conditions in the US and Europe could have a direct impact on as much as 80% of the revenues of Indian IT companies.

Infosys, however, cleared the air by saying it has not seen any project cancellations yet, nor are there any demands for price reductions.

Shares of the company fell nearly 6% on Friday, compared with a 2% fall in the broader market.

“They (customers) remain reluctant to award long-term sizeable contracts,” Viju K George and Amit Sharma, analysts with JP Morgan, noted in a report. “There is conservatism in spending.”
This time round, the impact of any slowdown may play out differently than in 2008, the company management said.

“In management’s view, unlike 2008, clients have already built in macro uncertainty in 2011 budgets and hence knee-jerk reactions to spending appear less likely,” Mitali Ghosh of Bank of America-Merrill Lynch noted in her report on Infosys.

Reflective of the cautious attitude, clients want to see proof of returns on investment before they invest more in projects and are taking a project-by-project approach to spending.

“Clients are now focusing on one programme at a time rather than multiple initiatives,” Srishti Anand and Ankita Somani of Angel Broking noted. “Also, each programme is broken into various parts typically over intervals of six to eight months to gauge value creation.”

With the uncertainty continuing in the demand environment, the Infosys management is keeping a close eye on its hiring to make sure it does not end up having one too many engineers on board and not enough work to keep them busy. The company, in fact, is reviewing its hiring plans every two weeks.

Also, it plans to increase its hiring abroad, to overcome any anti-outsourcing sentiment that may arise on account of high unemployment rates prevailing in troubled economies.

“This has been a trend which we have observed with Infosys. Though this move will increase the company’s expenses in the short term, in the long run, the company will reap benefits as clients are more comfortable in this set up,” an industry insider said, asking not to be named.

Meanwhile, investor sentiment on IT stocks continues to remain bearish.

On Thursday, BNP Paribas had lowered the fiscal 2013 earnings per share expectations for Tata Consultancy Services, Infosys, Wipro, HCL Technologies, MindTree and Persistent Systems by 12-31%, which is about 10-30% below Street consensus.

“Significant adverse macro data has recently emerged that could have a bearing on verticals such as financials, manufacturing and retail (61-74% of revenue for large-cap Indian IT companies),” analyst Abhiram Eleswarapu noted in his report. “Continuing weakness in telecom spending suggests likely lower visibility for about 80% of revenue.”

Stocks could fall to as much as 40-65% below their fair values, as they did in 2008, if the demand situation worsens for Indian IT firms, Eleswarapu warned