Kicking off results for India's nearly $60 billion IT sector, Infosys forecast tepid revenue growth due to global economic uncertainty and said margins would decline for the year ending March 2012, highlighting currency risks for the export-focused sector.
"Based on what Infosys has reported and forecasted, people will taper down their earnings estimates for the top players in the sector," said Tejas Doshi, vice president of research at Sushil Finance in Mumbai.
"You are seeing high fluctuations in the client spending due to global economic uncertainties. Margins will remain under pressure for the companies," he added.
Infosys, larger rival Tata Consultancy Services and No. 3 player Wipro have been battling a strengthening local currency and pay increases for staff as they fight to retain talent while competing with rivals such as IBM and Accenture.
Infosys Chief Operating Officer S.D. Shibulal said the company expected to raise wages 10 to 12 per cent in fiscal year 2012, while likely not being able to raise pricing. "We have assumed for all our guidance purposes flat pricing," he said.
Infosys shares fell as much as 9.3 per cent, the biggest single-day fall since May 19, 2009, and rival Wipro dropped as much as 5 per cent. The sector index fell 5.7 in a broader market down 1.3 per cent by 0815 GMT.
Economic worry weighs
"The biggest concern for Infosys' prospect this year is the slow recovery of the U.S. and European economy," said Eric Lin, manager of the India fund at Prudential Plc's fund unit in Taipei.
"There is pressure on margins. That is a combination of both cost pressures and the rupee. Even the outlook is below market expectation," said Nitin Jain, Singapore principal investment manager at Kotak Mahindra's fund management unit.
Infosys expects revenue for the fiscal year 2012 to rise between 18 per cent and 20 per cent to $7.1 billion and to $7.3 billion versus analysts' consensus forecast of $7.3 billion.
Infosys projected profit per American shares for this fiscal year to rise between 8 per cent and 10 per cent to $2.83 to $2.88 compared to consensus of $3.10.
"We don't think the result will hurt Infosys' leading position in the industry. The company has a cash-cow business, and its long-term competitive edge remains," said Lin from Prudential Plc's Taipei unit.
Revenue rose 22 per cent to 72.5 billion rupees as the firm added 34 new clients in the fiscal fourth quarter.
Indian software companies hedge some of their currency exposures, but a chunk of their costs are in rupees and appreciation of the local currency tends to squeeze margins.