April 25, 2013 / 3:00 AM / in 4 years

RPT-Infosys openness backfires as missed guidance frustrates market

4 Min Read

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    By Harichandan Arakali  and Aradhana Aravindan
    BANGALORE/MUMBAI, April 25 (Reuters) - The openness that
made Indian IT services outsourcer Infosys Ltd an
investor darling has come back to haunt it.
    For years, Infosys was an industry bellwether for not just
giving revenue and earnings guidance but usually exceeding it,
making it an outlier in a country where very few companies offer
guidance and corporate transparency is often lacking.
    But several times in the past two years, Infosys has missed
its own forecasts, precipitating violent stock moves that
culminated in a 21 percent plunge on the day of its most recent
earnings report. This has prompted some in the market to
question whether the company should keep giving guidance.
    "Considering that the company is unable to meet guidance,
the very act of giving guidance is becoming a reason for
volatility," said Jagannadham Thunuguntla, head of research at
brokerage SMC Global Securities in New Delhi.
    Its latest results came with a new growth forecast that was
below analyst expectations, and the one-day stock plunge was the
biggest in a decade for Bangalore-based Infosys.
    Only three months earlier, an unexpectedly strong December
quarter sent its shares nearly 17 percent higher on the day and
raised investor hopes for a turnaround. Growth at Infosys, the
No.2 Indian player by revenue, has lagged rivals as it struggled
to implement a strategic revamp amid difficult conditions for
its clients in the United States and Europe.
    "We think Infosys would have been better off not giving FY13
guidance than give one which lends itself to the worst possible
interpretations," JP Morgan analyst Viju George, based in
Mumbai, wrote shortly after Infosys' earnings report for the
year that ended in March.    
    In July, Infosys slashed its full-year dollar revenue target
and stopped giving quarterly revenue or earnings guidance.
    For the fiscal year that started this month, Infosys
forecast revenue growth of 6 to 10 percent in dollar terms, a
wider range than the 1 to 2 percentage points it typically gives
and less than the 12 percent growth expected by several
    "By giving revenue guidance so wide so as to render it
meaningless and by refusing to spell out a floor for FY14
margins and, particularly, by stating that it cannot predict
margins in the near term for its business, management has played
to the street's worst fears," George wrote.
    Infosys is not the only IT company to disappoint with its
outlook. Shares in third-ranked Wipro Ltd lost 8
percent after its March quarter earnings met forecasts but its
revenue guidance for the current quarter lagged market
    Industry leader Tata Consultancy Services Ltd does
not give specific guidance, but has said it expects its revenue
will grow faster than the industry trade group's forecast this
fiscal year.
    Infosys and some analysts argue that the company has a hard
time forecasting revenue because a significant chunk of
corporate customer spending on its services is discretionary.
    Chief Executive S. D. Shibulal told analysts after the
latest earnings announcement that it had become harder to make
quarterly predictions in a volatile environment. Still, he said,
"the rationale for guidance is not changed."
    Outside the IT sector, only a handful of Indian companies,
including Ranbaxy Laboratories Ltd, the country's top
drugmaker by sales, and leading construction and engineering
company Larsen & Toubro Ltd give revenue guidance.
    Several investors said Infosys should keep giving guidance.
    "If they stop giving guidance and still deliver this type of
numbers, then it will be even more negative," said Phani Sekhar,
a fund manager at Angel Broking in Mumbai, which owns Infosys
shares. "The best thing for them right now is to match up to
whatever they have said."

 (Graphic by Catherine Trevethan; Editing by Tony Munroe and
Chris Gallagher)

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