Muted Guidance

For a decade, the Indian Information Technology Industry (IT) and its poster boy, Infosys, led a charmed existence. Quarter after quarter and year after year, in clockwork fashion, the Bangalore-based IT bellwether delivered impressive sets of numbers. The market actually factored in a premium for the Infosys stock, as the management was seen as conservative, usually under-promising and over-delivering. Markets which like predictable growth duly applauded.

Clearly, times have changed. For the first time ever, the unwritten covenant that the management had built painstakingly with the markets has been broken. Infosys not only saw its fourth quarter revenues decline by 1.9 per cent in dollar terms, its volume growth went down by 1.5 per cent. However, even more importantly, the company failed to meet even its twice-lowered guidance numbers.

At the beginning of the year, Infosys said its FY2012 revenues in dollar terms would grow by 18-20 per cent, which after a quarter was revised downwards to 17-19 per cent before being amended to 16.4 per cent. Finally, when the numbers did come in, it delivered 15.8 per cent. Markets were swift and unforgiving, and hammered the firm's shares down 12.61 per cent, with most analysts indicating that there was further pain left in the next few trading sessions.

A bigger concern was the company indicating that it would grow by 8-10 per cent in FY2013. Industry body Nasscom has forecast that the Indian IT industry will grow by 11-14 per cent in the current year. If this does happen, for the first time ever, since it listed, Infosys would have grown slower than the average growth of the Indian
IT industry.

For over a decade, Infosys and other Indian IT companies have taken away market share from global IT services majors such as IBM, Accenture, Capgemini and HP in the $800 billion IT services market. However, Infosys's competitor Accenture, which has revenues of $27.4 billion and which declared its numbers recently, forecast that even on its large base it would grow revenue-wise by 12 per cent this year, in contrast to the 8-10 per cent by Infosys on its $7-billion revenue base.

The Infosys management has, however, been quick to point out the positives: the firm actually managed to improve net margins by 1.1 per cent in the fourth quarter and added 52 new clients. In spite of criticism from a section of analysts, Infosys has continued to focus on ‘quality of growth' and held on to its Ebitda (earnings before interest, taxes, depreciation and amortization) margins of more than 30 per cent.

S.D. Shibulal, the CEO and managing director of Infosys, defended the company's performance and outlook with a single phrase "Get used to the new normal". With other Indian technology heavyweights such as Tata Consultancy Services, Wipro and HCL Technologies scheduled to declare their results over the next few weeks, it will soon be clear whether the new normal is limited to Infosys or to the Indian IT sector as a whole.

(This story was published in Businessworld Issue Dated 23-04-2012)