Country’s second largest software services firm Infosys has said changes in policies and laws, both domestic and foreign, and intensifying competition in the technology services market may impact its revenues.
The Bangalore-based IT major said its profitability is being affected by pricing pressures on services, volatility of the currency exchange rates increased wage pressures in India and at other locations and rise in taxes or the expiration of tax benefits.
The firm in a filing to the US Securities and Exchange Commission (SEC) said earlier this week that the global environment is still facing uncertainty.
It said that recently, some countries and organisations have expressed concerns about a perceived association between offshore outsourcing and the loss of jobs.
Infosys added, “With the growth of offshore outsourcing receiving increased political and media attention, especially in the US, which is our largest market, and particularly given the prevailing economic environment, it is possible that there could be a change in existing laws or the enactment of new legislation restricting offshore outsourcing or imposing restrictions on deployment of and regulating wages of work visa holders at client locations, which may adversely impact our ability to do business in the jurisdictions in which we operate especially with governmental entities.”
Citing the example of Ohio state in the US, it said the Governor of Ohio has issued an executive order prohibiting any cabinet agency, board or commission of the State from expending public funds for services that are provided offshore.
“It is also possible that private sector companies working with these governmental entities may be restricted from outsourcing projects related to government contracts or may face disincentives if they outsource certain operations,” it said.
Preferential hiring treatment to hinder quality
Infosys added that retaining talent is important for maintain the company’s profitability.
“If we are unable to motivate and retain technology professionals, this could have an adverse effect on our business, results of operations and financial condition,” it said, adding that changes in policies or laws may also affect the ability of technology firms to attract and retain personnel.
Infosys also said, “The central government or state governments in India may introduce legislation requiring employers to give preferential hiring treatment to underrepresented groups.
“The quality of our work force is critical to our business. If any such central government or state government legislation becomes effective, our ability to hire the most highly qualified technology professionals may be hindered.”
Infosys has said it expects revenues to grow at 6-10 per cent for 2013-14 fiscal, much below IT industry body Nasscom’s industry growth projection of 12-14 per cent.
Besides, Infosys said the pricing pressure on services and currency fluctuations can also affect its profitability.
“Our profitability could be affected by pricing pressures on our services, volatility of the exchange rates between the Indian rupee, the US dollar and other currencies in which we generate revenues or incur expenses, increased wage pressures in India and at other locations where we maintain operations and increases in taxes or the expiration of tax benefits,” it added.
Expiration of tax holidays
Further, in the past, the company’s profit margin had been adversely impacted by expiration of certain tax holidays and benefits in India and it expects that this may be further adversely affected as additional tax holidays and benefits expire in the future, Infosys said.
The software services exporter also said, “Intense competition in the market for technology services could affect our cost advantages, which could reduce our share of business from clients and decrease our revenues.”
The technology services industry is experiencing rapid changes that are affecting the competitive landscape, which includes recent divestitures and acquisitions that have resulted in consolidation within the industry.
These changes may result in larger competitors with significant resources. In addition, some of the firm’s competitors have added or announced plans to add cost competitive offshore capabilities to their service offerings, it added.
“We may face competition in countries where we currently operate, as well as in countries in which we expect to expand our operations. We also expect additional competition from technology services firms with current operations in other countries, such as China and the Philippines,” it said.
Global economic uncertainty may hit profits
Global economic uncertainty, Infosys feels can also affect its margins.
“Our revenues are highly dependent on clients primarily located in the US and Europe, as well as on clients concentrated in certain industries and an economic slowdown or other factors that affect the economic health of the US, Europe or those industries, or any other impact on the growth of such industries, may affect our business,” it added.
The global economy, driven by slower growth in developed markets coupled with the European debt crisis, could have an impact on the growth of the IT industry.
The Infosys filing said that if the US or European economies remains weak or unstable or weaken further, the company’s clients may reduce or postpone their technology spending significantly, which may in turn lower the demand for its services and negatively affect the revenues and profitability.