The openness that made IT services outsourcer Infosys [ Get Quote ] Ltd an investor darling has come back to haunt it.
For
years, Infosys was an industry bellwether for not just giving revenue
and earnings guidance but usually exceeding it, making it an outlier in a
country where very few companies offer guidance and corporate
transparency is often lacking.
But several times in the past two
years, Infosys has missed its own forecasts, precipitating violent stock
moves that culminated in a 21 per cent plunge on the day of its most
recent earnings report.
This has prompted some in the market to question whether the company should keep giving guidance.
"Considering
that the company is unable to meet guidance, the very act of giving
guidance is becoming a reason for volatility," said Jagannadham
Thunuguntla, head of research at brokerage SMC Global Securities in New
Delhi [ Images ].
Its
latest results came with a new growth forecast that was below analyst
expectations, and the one-day stock plunge was the biggest in a decade
for Bangalore-based Infosys.
Only three months earlier, an
unexpectedly strong December quarter sent its shares nearly 17 per cent
higher on the day and raised investor hopes for a turnaround.
Growth
at Infosys, the No.2 Indian player by revenue, has lagged rivals as it
struggled to implement a strategic revamp amid difficult conditions for
its clients in the United States and Europe.
"We think Infosys
would have been better off not giving FY13 guidance than give one which
lends itself to the worst possible interpretations," JP Morgan analyst
Viju George, based in Mumbai [ Images ], wrote shortly after Infosys' earnings report for the year that ended in March.
In July, Infosys slashed its full-year dollar revenue target and stopped giving quarterly revenue or earnings guidance.
For
the fiscal year that started this month, Infosys forecast revenue
growth of 6 to 10 per cent in dollar terms, a wider range than the 1 to 2
percentage points it typically gives and less than the 12 per cent
growth expected by several analysts.
"By giving revenue guidance
so wide so as to render it meaningless and by refusing to spell out a
floor for FY14 margins and, particularly, by stating that it cannot
predict margins in the near term for its business, management has played
to the street's worst fears," George wrote.
Golden Silence?
Infosys is not the only IT company to disappoint with its outlook. Shares in third-ranked Wipro Ltd [ Get Quote
] lost 8 per cent after its March quarter earnings met forecasts but
its revenue guidance for the current quarter lagged market expectations.
Industry leader Tata Consultancy Services Ltd [ Get Quote
] does not give specific guidance, but has said it expects its revenue
will grow faster than the industry trade group's forecast this fiscal
year.
Infosys and some analysts argue that the company has a hard
time forecasting revenue because a significant chunk of corporate
customer spending on its services is discretionary.
Chief
Executive S. D. Shibulal told analysts after the latest earnings
announcement that it had become harder to make quarterly predictions in a
volatile environment. Still, he said, "the rationale for guidance is
not changed."
Outside the IT sector, only a handful of companies, including Ranbaxy Laboratories Ltd [ Get Quote
], the country's top drugmaker by sales, and leading construction and
engineering company Larsen & Toubro Ltd give revenue guidance.
Several investors said Infosys should keep giving guidance.
"If
they stop giving guidance and still deliver this type of numbers, then
it will be even more negative," said Phani Sekhar, a fund manager at
Angel Broking in Mumbai, which owns Infosys shares. "The best thing for
them right now is to match up to whatever they have said."