Wage hikes, falling margins may play spoilsport
Increasing reliance on discretionary projects, recent wage hikes coupled with falling margins may result in Infosys not meeting its annual growth forecast.
Analysts believe since the last few quarters, Infosys has been struggling to bag projects that are non-discretionary and are adopting a wait-and-watch approach towards discretionary projects such as ERP and software product upgrades.
“Some of the savings from the clients as a result of project rampdowns have not resulted in reinvestments into discretionary projects,” said Pralay Das, Analyst, Elara Securities.
Infosys has to grow at 14 per cent to achieve its 5 per cent growth guidance of this fiscal in the next two quarters. Generally, growth of IT companies slow down in the last two quarters due to a combination of factors. The October-December quarter tends to have fewer working days and in the fourth quarter, clients take a re-look at areas of outsourcing spend for the new fiscal.
This uphill task has forced some analysts to be bearish on the stock. According to Barclays analysts, Infosys is expected to grow by 3.8 per cent over the previous year. “The 5 per cent number is challenging considering that the outsourcing demand has not improved,” said Hardik Shah, IT Analyst, KR Choksey.
Infosys is also facing pressures on billing rates for work done out of India as it faces increasing competition from other Indian companies and as multinationals are lowering their pricing, according to industry watchers.
“Billing rate pressures over the last four quarters indicate that Infosys is under pressure to maintain its marketshare and is starting to offer discounts to existing and prospective clients. This is impacting EBITDA margins,” said Shah.
For Infosys, EBITDA margins have come down from 32.6 per cent in FY11 to 29.1 per cent this fiscal.
The company also had to give out wage hikes to its employees in the second quarter this year and this coupled with high subcontracting costs is adding to the company’s woes.
In a UBS investor meet, Infosys CEO S.D. Shibulal said that the company’s dollar revenue growth outlook of 5 per cent for this fiscal could be under threat.