June 10, 2016

infosys signals caution on growth

A news analysis writeup on Infosys  I contributed as a journalist this week:


Infosys became the first information technology major in the country to call out early signs of slowdown in revenues from IT services to the retail sector in the US and Europe. In last couple of quarters, the management commentary from major IT companies was positive on the
business from US retail, but Infosys has become the first to talk of negative growth.

The IT major also expressed experiencing new headwinds in the healthcare and life science business segment, and said it was no longer hopeful of seeing recovery in the insurance segment in the current financial year as it was at the start of FY17.

The company said while it overall full-year revenue guidance for FY17 of 11.5 per cent to 13.5 per cent will not be affected, it might see, short term, quarterly bumps given the propensity of its client to react to the short term volatility.

The retail segment, or the RCL (retail, consumer packaged goods and logistics) segment as it is termed by Infosys in its segmental reporting of revenues, contributed 16.4 per cent of Infosys’ consolidated revenue in FY16. North American and European clients of Infosys contributed 62.7 per cent and 23.0 per cent of its FY16 consolidated revenue respectively.

Infosys’ chief operating officer Pravin Rao said, “In the last couple of weeks we have seen the results (financial) of retailers, both in the US and Europe, have not been good. Its probably one of the poorest results seen in recent times.” Rao was speaking at a private investor conference on Wednesday, the audio transcript of which was released by Infosys on Thursday.

Rao was not sure immediately of how the retailers will react and the company will have to wait and watch. “In the beginning of this quarter (Q1 of FY17), when we gave the guidance, we were optimistic but now we are a little bit watchful on the retail space,” he said.

As a result of this change in Infosys management viewpoint coming to light on Thursday, the stock market reacted adversely by hiving off 3.0 per cent off the share price of Infosys which closed at Rs 1,187 on the NSE on Thursday. It was the second-largest loser among Nifty 50
constituents with Aurobindo Pharma seeing the biggest decline of 3.4 per cent.

The stock market, however, did not fully extend Infosys’ concerns to other major IT stocks. So, while Infosys fell by 3.0 per cent, Tata Consultancy Services’ share price declined by 1.2 per cent making it the 17th biggest loser among Nifty 50 companies. The share price of
HCL Technologies and Wipro actually gained by 1.0 per cent and 0.3 per cent respectively.

The impact of Infosys’ concerns on its financials may not be material. The Infosys management was indirectly saying that Q1 of  FY17 will not be great. But is difficult to tell whether this was the starting of things to come in terms of growth.

Infosys has had a track record of being the first to call out signs of
weakness. Analysts said there was no reason for Infosys to come out cautioning on growth and talking of quarterly bumps unless there was some substance in the matter.

Like Infosys, TCS also sees a significant portion of its consolidated revenue (14.1 per cent in FY16) coming from IT services to the retail and consumer packaged goods sector.

Infosys’ COO Rao was, however, confident of growth in other business segments of the company. “We have a good pipeline in financial services (barring insurance) where we grew close to 15 per cent last
year which we expect to continue in the current year. In manufacturing too, we are seeing traction, particularly in the auto space, although the aero space is a bit stagnant,” Rao said.

Of total Infosys consolidated revenue of Rs 62,441 crore in FY17, the financial services segment contributed 27.3 per cent, the manufacturing segment contributed 11.1 per cent, the ECS (energy, utilities, communications and services) contributed 21.7 per cent, the RCL (retail) segment contributed 16.4 per cent and the health and life sciences segment contributed 13.0 per cent.