Infosys outlook cut dims recovery hopes, slams shares

By Harichandan Arakali and Aradhana Aravindan

BANGALORE/MUMBAI (Reuters) - India's IT heavyweight Infosys Ltd (NSI:INFY.NS - News) made a deeper-than-expected cut to its sales forecast on Thursday as global economic uncertainty took a toll on tech spending, sending its shares down 10 percent and slamming hopes for a second-half recovery.

The prevailing dim global economic climate, competition for a bigger share of the outsourcing business and sharp currency fluctuations have slowed the pace of growth for Indian outsourcing companies and in recent quarters Infosys has been underperforming key rivals.

The company, India's No.2 software services exporter, had long been considered the industry bellwether for its practice of making and usually exceeding revenue forecasts.

It said it sees revenue in dollar terms rising 5 percent to $7.34 billion in the fiscal year to March 2013, down from its April estimate of 8-10 percent growth. The company also said pricing fell sharply. Most analysts were expecting Infosys to trim its sales growth outlook to 6-8 percent.

"Infosys' guidance is bad and it will have implications for the sector as well. It clearly reflects a slowdown in Europe and in the United States and (problems with) the company's internal policies," said Paras Adenwala, a fund manager at Capital Portfolio Advisors.

GRAPHIC: Infosys Q1 results http://link.reuters.com/vez39s

(Read expert views on Infosys results, clickhttp://in.reuters.com/article/2012/07/12/india-infosys-expert-views-idINDEE86B01S20120712)

Shares of Infosys, which was valued at about $25.5 billion before the market opened, fell as much as 10.2 percent to 2,219 rupees, their lowest in nearly three months, dragging the Nifty down 1.1 percent and the NSE sectoral index 5.5 percent. The 10.2 percent fall wiped out about $2.5 billion from the company's market value.

"We were expecting the guidance to be cut by 200 basis points, but it's much worse than that. Demand outlook for Infosys has worsened considerably," said Ankur Rudra, an analyst at Ambit Capital in Mumbai. "We think this is highly company-specific; expect relatively stronger results from its peers," he said.

Infosys also reported Thursday its net profit rose 33 percent to 22.89 billion rupees in the quarter ended June from 17.2 billion rupees a year earlier, in line with analysts' expectations.

Infosys, whose customers include Bank of America (BAC.N), BT Group (BT.L) and GlaxoSmithKline Plc (GSK.L), said revenue rose 28.5 percent to 96.16 billion rupees as it added 51 new clients in the quarter. It added 1,157 employees during the quarter, taking its total headcount to 151,151.

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After it gave disappointing guidance during its April results announcement, Infosys came under fire from investors for what some said was an overly conservative approach that put it at a disadvantage to rivals, adding to pressure on CEO S.D. Shibulal, who took the reins last year.

Infosys also was sitting on a cash pile of $3.7 billion as of the end of June and some investors have grown restless over the company's unwillingness to make a big acquisition or return some of the cash to shareholders.

"If you look at the environment, it's still very uncertain," Shibulal told reporters on Thursday. "In the financial services industry, in which we have 34 percent dependency, there were multiple events. I think sitting here in April, we couldn't have foreseen any of the events. The pipeline continues to be OK, but the question is how fast we can close (orders)," he said.

Pricing in the quarter fell 3.7 percent from the previous quarter and the company is seeing "sporadic pricing renegotiations" and demands for discounts, Shibulal said.

Infosys and its domestic rivals, Tata Consultancy Services (NSI:TCS.NS - News) and Wipro (NSI:WIPRO.NS - News), are part of the country's export-driven outsourcing sector that has benefited from an increase in demand for outsourcing to cut costs and boost efficiency.

India's $100 billion-a-year IT and back-office outsourcing sector earns about three-quarters of its revenues from customers in the United States and Europe and faces intense competition from global rivals including IBM (IBM.N) and Accenture (ACN.N).

Casting further gloom over the sector, U.S. automaker General Motors (GM.N), which outsources 90 percent of its IT work and does 10 percent in-house, plans to reverse that split to bring 90 percent in-house over three years, according to a July 9 story in U.S. industry publication InformationWeek. Infosys does not have significant exposure to GM.

Tata Consultancy is expected later on Thursday to post a nearly 25 percent rise in net profit for the June quarter to 29.7 billion rupees.

"With TCS also coming out today, let's see if this is a wider malaise affecting the entire industry or a deeper Infosys-specific problem," said P. Phani Sekhar, a fund manager at Angel Broking.

(Additional reporting by Sumeet Chatterjee, Prashant Mehra, Manoj Dharra and Abhishek Vishnoi; Editing by Matt Driskill and Tony Munroe)