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Money Jul 17, 2012

Five reasons why Infosys stock raises alarm bells ?

By Firstbiz Staff

Infosys sank to its 52- week low on Monday, raising concerns about not only the company's performance but the sector as a whole.The stock hit a yearly low of Rs 2,164 on the BSE before pulling back to Rs 2,172.60, a loss of Rs 55.20, at the close.

Infosys shares have corrected by almost 10 percent since July 12 after the company announced its first quarter numbers and cut its FY13 dollar revenue guidance growth to five percent from the earlier eight-10 percent.

Here are five reasons why the IT bellwether is losing its sheen

1. Issues remain unresolved at large: Loss of market share in a cost-efficiency business; growth pressure in the discretionary segments, client-specific ramp downs, revenue declines in BFSI (Banking, Financial Services and Insurance) and potential risk of employee attrition/productivity losses due to a freeze on wage hikes, is costing the company.

On the other hand, TCS not only expects to grow faster than industry body Nasscom's estimated growth rates of 11-14 percent but is also seeing better IT spends, ramp up in its US clients and has also started seeing discretionary spends come back.

AFP

The fact that TCS has given an 8 percent wage hike to its offshore employees clearly indicates TCS is seeing better traction in terms of its business outlook and prospects are not as bad as painted by Infosys, said IT analyst Sunidhi at Equity Bulls.

Even though the Infosys management maintains that Infosys has the right strategy and the company is on track to achieving its goals, results have clearly lagged peers such as TCS or Accenture, said brokerage Nomura in its latest report.

2. Too much dependence on recession-hit US and Europe

For the last seven quarters, the gap between TCS and Infosys has been widening. Analysts have attributed this divide to the difference in geographic spread of the business. The US and Europe account for 80 percent of TCS' revenue and 86 percent of Infosys. But TCS has a stronger presence in emerging markets like China and Latin America, among others, which has probably helped it weather the downturn in the IT sector.

3. No improvement in margins

TCS has improved margins even after rolling out pay hikes, whereas Infosys has postponed annual increments till now in the current year. During the quarter, TCS had eight $100 million-plus deals. Infosys had lost one $100 million-plus client, though it added one in the $200 million-plus category. According to Normura, FY13 appears to be similar to FY10 as clients cut spending and demand pricing discounts. However, the key difference, is that while the recovery in FY10 happened very quickly, it is likely to be protracted this time as clients today are already prepared for a slow recovery and are making their IT spending decisions by focussing on cost savings.

Despite BFSI clients facing macro headwinds TCS continues to grow in BFSI while Infosys struggles.BG Srinivas, who heads Infosys' Europe and financial services, feels that if its peers are seeing a better pipleline, it has to be client-specific and not industry-specific. In an interview with the Economic Times, he said revenues from Europe were down 8 percent sequentially because of financial pressures some clients are facing there.

According to Goldman Sachs, exposure to integrated banks (with retail operations) and a few large deals in insurance may be reason for TCS' outperformance in BFSI vertical, despite concerns surrounding budget cuts.

5. Uncertain outlook for the global IT space

Uncertain outlook for the global IT space has cast shadows on the profitability of the Indian IT companies. Major companies like General Motors going for in-sourcing and US government supporting them through tax breaks can affect the growth & profitability of the Indian IT space. Further, Infosys with continued disappointing numbers is likely to remain in seller's radar.

Meanwhile, Goldman Sachs also trimmed its global technology spending forecast to 3 percent from 4 percent for calendar year 2012 after its June annual survey of the industry. Goldman expects lower GDP growth in advanced economies and a lower global fixed investment forecast. Indian companies rely on spending by corporations in US and Europe for growth.

by Firstbiz Staff

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