Infosys Slumps After Sales, Growth Outlook Miss Estimates

Posted April 24, 2015 by Bianca Vazquez Toness at Bloomberg Business. See original article here.

Infosys Ltd. slumped the most in 11 months in Mumbai trading after the company’s annual revenue growth forecast missed estimates.

Shares of Infosys fell 6 percent, the most since last May 29, to 1,995.20 rupees at the close in Mumbai Friday after India’s second-largest software-services provider said sales in the 12 months started April 1 will rise by a maximum 8.2 percent in dollar terms. That trailed a projection for revenue growth of as much as 10 percent, according to the median of five brokerages’ estimates compiled by Bloomberg.

Sales in the three months ended March rose 4.2 percent to 134.1 billion rupees ($2.1 billion), also missing analysts’ estimates for 138.9 billion rupees.

Infosys missed estimates for the first time since Chief Executive Officer Vishal Sikka took charge in August with a promise to retrain employees and apply technologies including automation to meet clients’ needs. Sikka Friday announced the acquisition of a mobile commerce technology company, a venture with DreamWorks Animation SKG Inc. and investment in a startup as he revamps Infosys’s offerings.

“They’re getting slammed by the structural changes in the industry with many services getting automated,” Girish Pai, analyst with Nirmal Bang Institutional Equities in Mumbai, said by phone. “They’re doing the right thing by investing in it, but there is going to be a value compression of revenues happening. We’re going to see very tepid growth for the sector for the next two or three years.”

Pricing Pressure

Net income rose 3.3 percent to 31 billion rupees in the three months ended March, trailing the 31.7 billion-rupee median of 34 analysts’ estimates compiled by Bloomberg.

Infosys is the second Indian software exporter after larger competitor Tata Consultancy Services Ltd. to signal demand from customers in the telecom and energy industries will stay subdued and affect revenue.

“Pricing continues to be under pressure due to increasing commoditization in the traditional outsourcing business,” Chief Operating Officer U.B. Pravin Rao said in a statement. That is requiring the company to ramp up productivity through automation, he said.

Worldwide spending on information-technology services is projected to shrink 0.7 percent this year, led by cuts at U.S. companies, researcher Gartner Inc. projected on April 9.

Industrywide demand at India’s information technology companies “will be under pressure from low IT spending because of tepid sales growth across enterprises in developed countries,” Nirmal Bang’s Pai wrote in an April 16 note.

Kallidus Acquisition

Infosys won contracts last quarter from Hoofddorp, Netherlands-based delivery company TNT Express NV and Amsterdam-based ABN AMRO Bank NV. It added 52 customers in the quarter to end with a total of 950 active clients.

Since taking the helm, Sikka has focused on becoming more relevant to clients, who he says are experiencing a “profound shift in their industry” because of information technology.

Sikka has offered them ways to adjust their traditional work to meet new digital demands, such as using servers that can be accessed from anywhere and developing mobile applications. He’s also helping them automate tasks.

Infosys today said it will acquire Kallidus Inc. for $120 million. The San Francisco-based company, which is also known as Skava, has developed technology that automatically converts an online website into a mobile site, Sikka said Friday. The latest acquisition follows the purchase last month of automation technology company Panaya Ltd. for $200 million.

Takeovers

The Indian software provider is also investing 940 million rupees in a venture with DreamWorks Animation, DWA Nova LLC, to develop imaging technology for manufacturing.

Infosys also plans to spend as much as 50 percent of its cash flow on mergers and acquisitions and investments in infrastructure and technology, Chief Financial Officer Rajiv Bansal told investors Friday. The company, which had cash and near cash of $5.2 billion as on March 31, said Friday it would give one free share for each held and raised its dividend payout ratio to as much as 50 percent.

“Some of it is due to macroeconomic factors and others are due to more structural trends in the industry,” Sikka told investors in explaining the growth slowdown. “That is why we are encouraged that the steps we have taken in terms of renewing ourselves are absolutely necessary.”

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