Infosys Warns Of Weaker H2, Hints At Pricing Pressure

Infosys has warned of a weaker second half and cited challenges from two key customer accounts in the insurance sector along with volatility in industries such as energy and telecom.

Speaking during the Citi global technology conference in New York, Infosys chief operating office UB Pravin Rao said that the company was facing pricing pressure in some sectors but hopes to maintain its margin guidance of 25% plus minus one for the current fiscal year.

“Overall, we have had a very good first quarter and are seeing that momentum continue which makes us confident that we will meet our guidance,” said Rao. He added that however second half of the financial year, or H2, seems challenging. Though historically it has been weak for Infosys as well as most of the other players, the company is hoping that wins from the first half will offset some of the softness in the second half, Rao said.

While Infosys’ larger rival TCS and smaller competitors Wipro and HCL Technologies are yet to come up with their pre-results commentaries, industry analysts said that Rao’s comments should not be a matter of concern as what Infosys referred to is normal H2 seasonality that impacts all IT companies. December and March quarters are considered to be relatively softer because of the holiday season and lower number of working days.

“It’s not company specific-it impacts everyone,” said an analyst at a foreign brokerage who requested anonymity. “They’re (Infosys) still holding their guidance for FY16, so I don’t think there is anything to be concerned about,” said another analyst at a foreign brokerage.

Rao said that the overall demand for the industry is decent across industries and geographies. There is good traction in financial services, however insurance is a laggard for the company. “Primarily, we are challenged from one or two customers which are flat. Our presence in insurance is also limited,” said Rao. While it is seeing moderate traction in manufacturing and good response in auto and high tech industries, there are some challenges in aerospace. Retail and consumer products group is also performing better than before for the company and it is very optimistic in the life sciences vertical.

“The energy sector is fairly challenging with the declining oil prices and the current volatility, we are seeing a lot of pricing pressure and project cancellations, postponements and rebids. We expect this to continue this year, and even in early part of next year,” said Rao adding that stability should come only in calendar year 2017. Similarly for the telecom sector, the company is seeing volatility since most of the players in the industry are challenged in terms of their revenues and profitability. “Net net, barring energy, telecom and insurance, we are seeing lot of positivity… Geography wise, it is fairly uniform across Americas and Europe,” he added.

In a recent note on Infosys James Friedman, an analyst for Susquehanna International Group said that it has increased Infosys’ revenue target for FY16 from $9,338 m to $9,436 m which represents a 11.1% constant currency growth. “In general, IT Services seem to be seeing better overall demand this year, with some market share shifting from IBM elsewhere. While the numbers aren’t large, Infosys’ new automation products seem to help its marketing messages and are getting them in the door for broader discussions,” said Friedman.