Providing guidance is a double edged sword. It is essentially used as a tool to shift investor interest from short term results to long term prospects, and provide a map to the road ahead. But it can also boomerang on the company, as Infosys has found out pretty badly. Miss the forecast and analysts come swooping down. The company does not seem to be very intent on changing course yet, despite missing the guidance numbers repeatedly. There is a view that Infosys should stop providing full year forecasts, but the management has not taken very kindly to such suggestions.
The company has been providing full year guidance since 1995, a practice that gave it a great name in investor circles. For more than a decade, Infosys routinely outperformed its guidance so much so that no one worried whether the forecast will be exceeded or not. That was a foregone conclusion. Those were the real celebratory years, but there are cracks on the wall now. Some real, solid cracks have appeared that require immediate attention.
Since Infosys provides forecasts?pretty boldly we must say considering the uncertain economic environment?critics have a great tool to measure the company with and attack it severely when things go astray. CFO V Balakrishnan and CEO SD Shibulal have both said that giving guidance has been a challenge. The firm has provided a revenue growth guidance of 8-10% for FY13, when Nasscom itself has projected an industry growth rate of 11-14%. It is difficult to digest that Infosys is now lagging industry growth rates, but that is the truth.
Analysts have said that it is a company specific issue and not reflective of the industry. Hence Nasscom has said that it would not like to revise the revenue guidance numbers for the sector as a whole, and instead wait for TCS and Wipro results.
Interestingly, TCS and Wipro do not forecast for the full year. Wipro limits the exercise only to quarterly guidance numbers and does not venture out to forecast revenues for the whole year. Hence, IT analysts have been less critical of their numbers. One has to remember that Infosys registered a 27.4% growth in net profit on a year-on-year basis, despite all the din about its revenue forecast. And that is no mean feat, considering it is a $7 billion dollar behemoth. But since it provides full year guidance, analysts get a whip to hold, which they are happy to crack these days.
Infosys may be better off limiting its forecasts to a quarterly basis. That would be more prudent considering the poor visibility ahead.
Last year, the company had altered its forecasts twice. In October, it slashed its dollar revenue growth target to 17-19% from the 18-20%, set at the beginning of the year. Later in January, it further reduced the target to 16.4%. Infosys had to slash its forecast for the first time only in 2008, during the height of the global economic crisis.
The question now is how long will Infosys continue to provide guidance. With visibility becoming tougher, it would be increasingly difficult for it to keep giving these forecasts. Some of the analysts no longer consider Infosys guidance as a torch bearer for the industry. That should be a worry for Infosys.
It is now time for the company to start looking inwards for answers. There has to be a reason why it is not able to meet the guidance numbers repeatedly. Infosys has said that it witnessed some ramp down in the BFSI space during the fourth quarter. But the real reasons have to be beyond these. Maybe it needs restructuring both in terms of human resources as also business verticals.
Infosys traditionally has not liked low hanging fruits. It has always gone after high margin play, willing to compromise on the number of deals won. Critics say that it is probably time to give up that strategy, and compete for volumes. That may be a tough call, and would involve redressing the very fabric of the company.
