Infosys Ltd. (INFO), India’s second-largest software exporter, is shunning Italy and Spain as risks from the worsening sovereign-debt crisis outweigh a goal of doubling the share of sales from Europe.
“We have stayed away from these markets,” said B.G. Srinivas, head of Europe at Bangalore-based Infosys, referring to Greece, Portugal, Italy and Spain. “Especially in a crisis, I don’t think that we will revisit that decision soon. It’s the wrong time to enter.”
Uncertainty over payments and exchange-rate volatility means Indian software companies are wary of striking outsourcing deals in Europe’s weaker economies even as they try to reduce their dependence on the U.S. for revenue. Spain became the fourth euro member to seek a bailout since the start of the crisis with a request on June 9 for as much as 100 billion euros ($126 billion) to rescue its banks.
Infosys’s strategy underlines the chilling effect the turmoil in Europe is having on companies and economies around the world. With the euro area registering no growth in the first quarter and India’s expansion the slowest in nine years, Infosys is betting it can do without a slice of the combined 58 billion euros that Forrester Research Inc. (FORR) estimates governments and businesses in Italy and Spain will spend on information technology goods and services in 2012.
“It’s the right strategy,” said Shashi Bhusan, an analyst at Prabhudas Lilladher Pvt. in Mumbai who rates Infosys buy. “If an implosion happens in the euro zone, there’s going to be a wider impact -- not just in terms of IT spending.”
Forrester predicts the European information technology market could shrink by as much as 10 percent in 2012 if a country exits the euro. The single currency slipped to an almost two-year low against the dollar this month as policy makers clash over how to resolve the crisis, now in its third year.
Citigroup Inc. economists are assuming as a “base case” that Greece will leave the single currency on Jan. 1, 2013. Bank of America Merrill Lynch strategists estimate the euro-region’s gross domestic product would contract at least 4 percent in the recession that follows, similar to the decline suffered after Lehman Brothers Holdings Inc.’s 2008 collapse.
Infosys has declined 12 percent in Mumbai trading this year, compared with a 6.3 percent gain for larger rival Tata Consultancy Services Ltd. (TCS) India’s benchmark Sensitive Index has rallied 9.1 percent. Infosys, which slumped the most in almost three years on April 13 after forecasting full-year sales that missed analyst estimates, rose 1.2 percent to 2,448.15 rupees as of 11:06 a.m. local time.
Infosys, which aims to almost double the share of revenue from European customers to 40 percent from 22 percent in the year ended March 31, has said it is prepared to spend as much as $500 million on a single acquisition in a European market. Tata Consultancy, based in Mumbai, is also weighing acquisitions in France, Germany, Japan and the U.S., Chief Executive Officer Natarajan Chandrasekaran said in September.
The U.S., the world’s biggest market for IT services, buys about 60 percent of the South Asian country’s computer services, according to the National Association for Software & Services Companies. North America accounted for 65 percent of Infosys’s sales last year, according to its annual report.
Infosys still sees opportunities in parts of Europe where companies are striving to compete in the global market, Srinivas said.
“There’s definitely a perceptible shift in the mindset of companies” in Germany and France, he said. “They’re definitely looking at increasing their own competitiveness because they’re competing globally with the American companies, the Japanese companies, the Koreans. So, they have to improve their internal cost base.”
HCL Technologies Ltd. (HCLT), the New Delhi-based software exporter which outbid Infosys to acquire U.K.-based Axon Group in 2008, is mainly focused on the U.K., and Nordic, French and German-speaking countries, according to Rajeev Sawhney, president for European operations. HCL doesn’t have local teams in Greece, Portugal, Spain and Italy, he said.
“I would hesitate from going into the turmoil at this stage,” said Sawhney. “It could have other repercussions -- whether you’d get paid, whether you’d get paid on time. What could be the volatility in the currency exchange rate?”
HCL is targeting companies in Europe which are adopting austerity measures and who need help implementing cost cuts, said Sawhney. The pressure on corporate budgets means there is an increasing percentage of “first-time outsourcers” in the region, he said.
Revenue from Europe at Infosys grew 26 percent in the 12 months ended March 31, double the previous year’s pace, to 66.1 billion rupees ($1.2 billion), according to the company’s annual report. Sales in the North American market increased 21 percent in the period to 203.5 billion rupees.
Brokerages including Nomura Holdings Inc., Goldman Sachs Group Inc., Macquarie Group Ltd. and CLSA Asia-Pacific Markets cut their recommendations on Infosys in April after the software exporter’s annual sales forecast trailed estimates.
Infosys on April 13 predicted sales in the year that began April 1 will be between 384.3 billion rupees and 391.4 billion rupees. That lagged behind the 396.3 billion-rupee median of 64 analysts’ estimates compiled by Bloomberg.
Meanwhile the financial turmoil in Europe has shown little sign of ending. While European Central Bank President Mario Draghi left the door open at a June 6 press conference to a rate cut, he highlighted the limitations of the ECB’s tools as policy makers race to avoid the breakup of the single currency.
“As long as the implosion doesn’t happen -- the overall uncertainty is something all of us can handle because we are all prepared for it,” said Srinivas. “As long as that continues, business will be steady. If implosion happens, we’ll have a very unpredictable situation.”
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