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Krishnan Thiagarajan

INFOSYS Technologies' revenue growth forecast of 21-23 per cent and per share earnings growth of 11-12 per cent has jolted the markets. The stock plummeted by Rs 1,113, or 26.7 per cent, during the day's trading.

Why has the Infosys stock suddenly lost its sheen? To place this management guidance in perspective, consider the projections made by Infosys for 2001-02. It had projected an upper band in revenue growth of 21 per cent and per share earnings growth of 18 per cent. A comparison clearly reveals that the margins (both operating and net) are likely to suffer a sharp decline in 2003-04.

In the fourth quarter of 2002-03, the operating margins of Infosys fell sharply by over 6 percentage points on a year-on-year basis and nearly 1.5 percentage points on a quarter-on-quarter basis. The Infosys management attributed it to a pressure on billing rates and a strong rupee.

For the first time, the top management of Infosys has indicated that the margins may suffer a sharp fall. So far, the ability of Infosys to maintain margins in the 34-36 per cent band has been almost taken for granted.

To draw a parallel, this guidance can be compared to the revenue forecast of 30 per cent made by Infosys for 2001-02, after it had clocked a revenue growth of over 100 per cent in 2000-01.

The guidance had established the cyclical nature of the software industry then.

On that occasion, the company's stock price had dipped by Rs 618 in a single trading session.

So far, the Infosys management has claimed that there was hardly any differential in the gross margins between Indian and global software service providers such as IBM Global or Accenture. The higher operating and net margins of Infosys were accounted for mainly by lower selling, general and administrative cost and lower tax outgos. From this lower per share forecast, it appears that this cost arbitrage enjoyed by Indian software majors may be bridged in the coming years.

All the other reasons trotted out by Infosys for a decline in revenue and per share earnings growth are on expected lines.

On top of the list are the continued slowdown of the US economy, the Iraq war and SARS (Severe Acute Respiratory Syndrome).

Of these, only the slowdown in the US economy has a potential long-term impact.

Most research reports by leading firms such as Gartner, AMR Research and Goldman Sachs have projected a flat IT spend for 2003.

And it appears that the flat IT spend may have a negative impact on the earnings of Infosys in the coming year.

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