Obama Budget Cuts Set to Squeeze Infosys’ Sales: Corporate India

Infosys Ltd., the Indian software developer which plunged last week after forecasting sales that lagged estimates, may struggle to win clients as U.S. President Barack Obama’s $85 billion in spending cuts prompts companies to rein in spending.

Fifteen percent of prospective contracts for Infosys were canceled in the year ended March 31 as customers reduced discretionary spending for “rainy day regulations,” said Ashok Vemuri, head of Americas at the Bangalore-based company. U.S. budget cuts in manufacturing and financial services may prompt companies in those industries to reduce investment in information technology products, he said.

Infosys, India’s second-largest provider of IT services, made 62 percent of its revenue in North America last fiscal year. The reductions in Obama’s budget, which undercut his push to increase funding for research, education and infrastructure, may mean Infosys’ sales will lag behind their estimate, according to Harit Shah, an analyst with Nirmal Bang Equities Pvt. in Mumbai.

“We will start to see these cuts in bits and pieces over the next couple of quarters as they trickle down to industry,” Vemuri said in a phone interview from Bangalore. “The symptom of that is the number of deals that die before they come to the table has gone up because companies are saving cash piles to cover new regulation.”

Sales Forecast

Infosys’ shares fell 21 percent, the biggest slump in a decade, on April 12 after saying revenue in the year that started April 1 will grow 6 percent to 10 percent. The drop made Infosys the worst-performing stock in the 1000-company MSCI Asia Pacific Index. The company’s American depositary receipts lost 21 percent in New York.

The company’s stock gained 1.9 percent to 2,339.05 rupees in Mumbai after dropping as much as 4 percent. The S&P BSE Sensex rose 0.6 percent.

The company forecast for sales growth was less than the median 13 percent estimated by 66 analysts surveyed by Bloomberg. Indian information technology industry body Nasscom said sector sales may rise 12 percent to 14 percent in the year to March 31.

The company’s earnings margin before interest, taxes, depreciation and amortization in the three months ended March 31 narrowed to 26.5 percent, according to Batlivala & Karani Securities Pvt. That’s the lowest since at least 2005, according to data compiled by Bloomberg.

Infosys is “a good company but unfortunately demand for its services isn’t just picking up,” Gary Greenberg, a fund manager at Hermes Fund Managers Ltd., said in an interview to Bloomberg TV. “Infosys is trying to make a transition to becoming a consultancy company but that’s harder than it looks. We happily don’t own Infosys.”

Option Contracts

Volumes in Infosys’ put options in India jumped to 313,902 contracts on April 12 from 125,421 a day earlier. They fell to 124,711 contracts today. Puts give the right to sell a security for a certain amount, called the strike price, by a given date. Volume of calls, which convey the right to buy, were at 161,752.

Chief Executive Officer S.D. Shibulal didn’t provide an earnings-per0-share forecast, saying the “unknowns are substantial.” Shibulal and six colleagues started the company after borrowing $250 from their wives in 1981.

“There’s a chance that they could miss their next guidance, but as the CEO said, there are too many variables that remain unclear to really predict what’s going to happen,” said Nirmal Bang’s Shah. “The confidence in this company has clearly gone for a toss.”

Defense Contractors

President Obama signed the $984 billion government funding bill into law on March 27, locking in spending cuts for research, education and infrastructure. Obama unveiled a $3.78 trillion fiscal year 2014 budget on April 10 that would end the sequester cuts. That may not reduce the “detrimental impact on spending,” Infosys’ Vemuri said.

“Sequestration has already had an impact on IT services here in the U.S.,” said Washington D.C.-based Bloomberg Government analyst Afzal Bari. “The federal government gives a lot of money to states for Medicaid systems and that money is subject to cuts. States often hire Indian outsourcing companies for those projects.”

Obama’s budget may reduce spending on information technology by $2.5 billion by 2015, according to Bloomberg Industries’ Anurag Rana. Companies including Northrop Grumman Corp., Lockheed Martin Corp., the world’s largest defense contractor, and SAIC Inc. may be affected, Rana said.

Manufacturing companies including defense contractors and aircraft makers accounted for 22 percent of Infosys’ revenue in the three months ended March 31, while banking, financial services and insurance contributed 34 percent.

Tata Consultancy

Sequestration may also hurt Infosys’ rivals including Tata Consultancy Services Ltd., Asia’s biggest software developer by market value, and HCL Technologies Ltd., Nirmal Bang’s Shah said.

Tata Consultancy Chief Executive Officer Natarajan Chandrasekaran and HCL Technologies Chief Financial Officer Sandeep Kanwar said their companies haven’t been affected by the U.S. budget cuts.

Tata Consultancy on April 17 may say profit increased 10 percent to 36.1 billion rupees from 29.3 billion in the quarter ended March 2012, according to Bloomberg’s survey of 38 analysts. Net income rose 23 percent in the preceding three months, while Infosys reported a 0.1 percent drop.

Spending on information technology services worldwide is estimated to climb 4.5 percent this year, faster than in 2012, Gartner Inc. said on March 28. An economic revival in North America may help boost sales at software developers.

U.S. Economy

Morgan Stanley’s chief U.S. economist Vincent Reinhart sees a 3 percent pace of growth for the world’s biggest economy in the quarter ending in June, up from 0.08 percent in December.

Top information technology service providers are predicted to post “double-digit” growth as a recovery in the U.S. and in financial services stokes demand, according to Rana.

Infosys, “as indicated by a dismal topline growth guidance, continues to struggle competitively, including win rates and project ramp-ups,” Moshe Katri and Avishai Kantor, analysts at New York-based Cowen & Co. said in a note to clients on April 12. “We believe Infosys’ issues continue to be company-specific rather than industry-specific.”

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