Infosys Sees ‘Hit’ as Clients Cut Tech Budgets

By Ketaki Gokhale - Nov 14, 2011 1:52 PM GMT+0700

Infosys Ltd., India’s second-largest software exporter, said growth may slow next year because of a possible reduction in technology spending by clients.

Infosys is seeing “volatility” in customers’ decision- making, Co-Chairman S. Gopalakrishnan said in an interview in Mumbai yesterday. Sales growth at the Bangalore-based company fell in each of the past four quarters as a global economic slowdown prompted companies to reduce their outsourcing contracts.

“Probably there will be some budget cuts for next year,” said Gopalakrishnan, 56. “In the short term, you will take a hit. You can’t restructure your business, look at new areas fast enough to replace everything that is lost.”

The comments are the first the code writer made since it slashed the dollar-based sales forecast for the year ending in March last month while increasing the rupee estimates because of a weaker currency. Infosys, which has the biggest cash pile in India’s computer-services industry, aims to expand by spending $700 million on acquisitions in areas where the company has “very small” exposure, the former chief executive said.

“Budgets in Europe will come down quite substantially,” said Ankur Rudra, an analyst at Ambit Capital Pvt. in Mumbai, who has a “sell” rating for Infosys shares. Budget reductions in Europe will be bigger than among the U.S. companies, he said.

Infosys rose 1.3 percent to 2,813.05 rupees after gaining 2 percent earlier today. The shares have declined 18 percent this year, compared with a 1.6 percent drop for bigger rival Tata Consultancy Services Ltd. (TCS)

Rupee, Forecast

Last month, Infosys decreased its forecast for sales in dollar terms in the year ending March 2012 to a range of $7.08 billion to $7.2 billion, from a range of $7.13 billion to $7.25 billion it estimated in July.

Infosys raised the guidance in rupee terms to between 335 billion rupees and 340.9 billion rupees, from an earlier forecast for 317.8 billion rupees to 323.1 billion rupees.

Last week, the rupee fell to the lowest since April 2009, which helps inflate the repatriated value of overseas sales at Infosys and other Indian software companies.

Gopalakrishnan said some of the budget cuts may be offset by customers allocating a greater portion of their spending to offshore software-service providers.

Infosys is looking to acquire companies that specialize in providing technology services to health-care companies and utilities, companies that build software platforms, or companies based in non-English speaking countries, including Germany, France and Japan, Gopalakrishnan said. Infosys is looking at three to four targets at a time, he said.

Acquisition Targets

“We are seeing volatility in all sectors except some, like utilities and health care, which are countercyclical,” he said. “But our exposure to these sectors is very small. We want sectors that are countercyclical to become a larger part of our portfolio.”

Customers in the health-care industry contributed 1.8 percent of Infosys’s revenue in the quarter ended Sept. 30, compared with 35.1 percent contributed by customers in the insurance, banking and financial services industry, according to the company.

Global IT Spending

Infosys had 185 billion rupees ($3.7 billion) of cash, near-cash items and short-term investments at the end of September, according to Bloomberg data.

Tata Consultancy may spend as much as $500 million on an acquisition in Germany or Japan, Chief Executive Officer N. Chandrasekaran said in February.

Growth in worldwide spending on IT goods and services by businesses and governments, which includes computer equipment and outsourcing, will slow to 5.5 percent in 2012 for a total of $2.15 trillion, from estimated growth of 11 percent this year, according to a Sept. 16 Forrester Research Inc. report.

The outlook for IT demand in 2012 is “not bright,” as weak economic growth in the U.S. and Europe will make business and governments more cautious about investing in technology, according to the report from the Cambridge, Massachusetts-based researcher.

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net