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In the light of a lower-than expected fourth quarter performance by Infosys, Nomura expects consensus earnings and multiple downgrades and management’s outlook of pricing and margin pressure in the near term
IT services major Infosys reported net profit of Rs2,394 crore for fourth quarter of fiscal 2012-13, registering a marginal 3.4% year-on-year (y-o-y) growth and 1.1% sequentially, as per Indian accounting standard.
In a regulatory filing with the exchanges, the IT major said consolidated revenue for the quarter under review, however, rose 18% y-o-y to Rs10,454 crore and flat (0.3%) sequentially.
Under the International Financial Reporting Standards (IFRS), net income declined 4.1% y-o-y to $444 million but up 2.3% sequentially, while gross revenue grew 9.4% y-o-y to $1.94 billion, a marginal increase of 1.4% sequentially.
According to Nomura Equity Research’s Quick Note on the IT major’s performance, Infosys 4Q results disappointed on several counts:
1) 4Q revenue growth of 1.4% q-o-q was significantly below guidance (4.1%) and Nomura’s expectations of 4.2% and street expectations of 3.9%;
2) FY14 revenue growth guidance of 6%-10% was below expectations (of 11-13%) while the guidance band was wider than usual suggesting lack of clarity; and
3) no EPS guidance was provided.
Nomura’s analysts expect consensus earnings and multiple downgrades on the back of the weak result and management’s outlook of pricing and margin pressure in the near term.
Infosys’ management indicated that there were delays in deal ramp-ups and deal closures in 4Q. While 4Q volume growth at 1.8% q-o-q was better than 3Q (1.5% q-o-q), pricing decline of 0.7% q-o-q and cross currency impact of 0.4% q-q impacted revenue growth. Also, Lodestone had a soft quarter ($51 million against guidance of $65 million) on account of muted business activity as well as inability to recognize some revenues in Q4 because of differences in revenue recognition policies.
The management stated that demand environment is weak and the environment is very volatile. Client IT budgets are tending to flat to marginally down compared to last year.
On pricing the management stated, “There is pricing pressure in the non-discretionary portfolio (63% of revenue) and management expects this to get worse in the near term. It hopes to balance the pricing pressure in this segment with growth in the discretionary segments where the company has pricing power.”
The company’s management expects the environment to be challenging and is finding it difficult to predict margins in the short-term as there are unknowns like pricing, cost of hiring onsite given likelihood of visa shortage and investments required to be made to push growth. Given all this, it decided to look at margins in the long-term and not give a margin guidance which would restrict it from making the necessary investments.
This apart, Infosys has not made any decision yet and will issue an update on compensation increases for FY14 during the year.