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Infosys (INFY) Weighed Down by Visa Scare, Weakening Sales
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Over the last few months, India’s premium technology behemoth, Infosys Limited (INFY - Free Report) has grabbed headlines for all the wrong reasons. Heightening fears involving H-1B visa program, conflict within the top brass, rumors of a stake sale by founders and bad press have been doing the rounds, maligning the reputation of India’s second largest IT firm.
Though management has nullified rumors of a stake sale, it appears that the other challenges will continue to spook investors, at least in the short run. The share price movement over the past three months mirrors the troubling times, as Infosys’ shares have lost 3.8% against the Zacks categorized IT Services industry’s gain of 2.0%. Analysts also have their fair share of apprehensions over the company’s prospects, and their estimates show a similar trend. The Zacks Consensus Estimate for full-year 2017 earnings has inched down from 98 cents to 97 cents, due to three downward estimate revisions versus none upward.
The clouds hanging over the company were strongly reflected in its latest annual filing of the company with the U.S. Securities and Exchange Commission.
Given its array of problems, we believe that Infosys is in for an even bumpier ride in the foreseeable future. Let’s take a deeper look at the headwinds, which have significantly thwarted the company’s growth drive.
Heightening Visa Scare
The unexpected victory of Donald Trump in the presidential election had sent the Indian IT industry into panic mode, as frontrunners feared Trump’s stance on anti-immigration policies. Six months later, matters are still looking unclear as no major changes have materialized yet. However, it is hard to ignore the deafening echo of Trump’s “Buy American, Hire American” program.
Infosys is already feeling the heat — just last month, it had announced plans to hire about 10,000 American workers over the next two years. The company has decided to stop junior employees from applying for H-1B visas to ease things out. The changing times are a direct threat to the company’s economical cost structure, which focuses on using its workforce on site located abroad. Infosys’ profitability remains questionable till matters relating to the migration policy become clearer.
Boardroom Bickering
If the external troubles are not enough, in the past few weeks, trouble within the top tier of the management has surfaced, making matters worse. There have been reports about a tussle between the founder and promoters of the company. The company’s board has received flak from its co-founder, N.R. Narayana Murthy, over the high compensation of Vishal Sikka, the company’s CEO and MD.
Rumors of the boardroom bickering continue further. Some sources claim that Murthy has asked chairman R. Seshasayee to step down. However, in a recent interview with Financial Times, Seshasayee denied rumors of the conflict.
Weakening Demand
Infosys’ biggest problem at the moment might be the weakening demand of its traditional business, which has put its top line under pressure. Rapid proliferation of customizable internet-based software has been hampering Infosys’ traditional outsourcing business. The company is struggling with a precipitous decline in client spending, which continues to thwart growth.
Most clients now prefer to seek service delivery through digital technology, adding to Infosys’ woes. Also, slower project ramp-ups in large deals are adding to its challenges. The company, considered as a gauge for the health of the $3-trillion global enterprise-spending market, reduced its guidance for fiscal 2018 to 6.1–8.1%, which is much lower than the market’s expectations.
Also, intensifying competition from established IT peers as well as new competitors is likely to pressurize margins. In fact, the company’s growth forecast is lower than that of Cognizant Technology Solutions Corporation (CTSH - Free Report) , which expects to grow between 8–10%. In light of these intensifying problems, the Zacks Rank #4 (Sell) stock has not confirmed its ambitious $20 billion revenue and 30% operating-margin target (expected to achieve by 2021) in its 2016-17 annual report.
With four back-to-back beats, Applied Materials has an average positive surprise of 3.3% for the trailing four quarters.
Cohu has a striking earnings surprise history, with an average positive surprise of 121.2% for the trailing four quarters, beating estimates all through.
3 Stocks to Ride a 588% Revenue Explosion
At Zacks, we're mostly focused on short-term profit cycles, but the hottest of all technology mega-trends is starting to take hold...
By last year, it was already generating $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for those who make the right trades early. See Zacks' Top 3 Stocks to Ride This Space >>
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Infosys (INFY) Weighed Down by Visa Scare, Weakening Sales
Over the last few months, India’s premium technology behemoth, Infosys Limited (INFY - Free Report) has grabbed headlines for all the wrong reasons. Heightening fears involving H-1B visa program, conflict within the top brass, rumors of a stake sale by founders and bad press have been doing the rounds, maligning the reputation of India’s second largest IT firm.
Though management has nullified rumors of a stake sale, it appears that the other challenges will continue to spook investors, at least in the short run. The share price movement over the past three months mirrors the troubling times, as Infosys’ shares have lost 3.8% against the Zacks categorized IT Services industry’s gain of 2.0%. Analysts also have their fair share of apprehensions over the company’s prospects, and their estimates show a similar trend. The Zacks Consensus Estimate for full-year 2017 earnings has inched down from 98 cents to 97 cents, due to three downward estimate revisions versus none upward.
The clouds hanging over the company were strongly reflected in its latest annual filing of the company with the U.S. Securities and Exchange Commission.
Given its array of problems, we believe that Infosys is in for an even bumpier ride in the foreseeable future. Let’s take a deeper look at the headwinds, which have significantly thwarted the company’s growth drive.
Heightening Visa Scare
The unexpected victory of Donald Trump in the presidential election had sent the Indian IT industry into panic mode, as frontrunners feared Trump’s stance on anti-immigration policies. Six months later, matters are still looking unclear as no major changes have materialized yet. However, it is hard to ignore the deafening echo of Trump’s “Buy American, Hire American” program.
Infosys is already feeling the heat — just last month, it had announced plans to hire about 10,000 American workers over the next two years. The company has decided to stop junior employees from applying for H-1B visas to ease things out. The changing times are a direct threat to the company’s economical cost structure, which focuses on using its workforce on site located abroad. Infosys’ profitability remains questionable till matters relating to the migration policy become clearer.
Boardroom Bickering
If the external troubles are not enough, in the past few weeks, trouble within the top tier of the management has surfaced, making matters worse. There have been reports about a tussle between the founder and promoters of the company. The company’s board has received flak from its co-founder, N.R. Narayana Murthy, over the high compensation of Vishal Sikka, the company’s CEO and MD.
Rumors of the boardroom bickering continue further. Some sources claim that Murthy has asked chairman R. Seshasayee to step down. However, in a recent interview with Financial Times, Seshasayee denied rumors of the conflict.
Weakening Demand
Infosys’ biggest problem at the moment might be the weakening demand of its traditional business, which has put its top line under pressure. Rapid proliferation of customizable internet-based software has been hampering Infosys’ traditional outsourcing business. The company is struggling with a precipitous decline in client spending, which continues to thwart growth.
Most clients now prefer to seek service delivery through digital technology, adding to Infosys’ woes. Also, slower project ramp-ups in large deals are adding to its challenges. The company, considered as a gauge for the health of the $3-trillion global enterprise-spending market, reduced its guidance for fiscal 2018 to 6.1–8.1%, which is much lower than the market’s expectations.
Also, intensifying competition from established IT peers as well as new competitors is likely to pressurize margins. In fact, the company’s growth forecast is lower than that of Cognizant Technology Solutions Corporation (CTSH - Free Report) , which expects to grow between 8–10%. In light of these intensifying problems, the Zacks Rank #4 (Sell) stock has not confirmed its ambitious $20 billion revenue and 30% operating-margin target (expected to achieve by 2021) in its 2016-17 annual report.
Stocks to Consider
Some better-ranked stocks in the broader sector include Applied Materials, Inc. (AMAT - Free Report) and Cohu, Inc. (COHU - Free Report) . Both Applied Materials and Cohu sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
With four back-to-back beats, Applied Materials has an average positive surprise of 3.3% for the trailing four quarters.
Cohu has a striking earnings surprise history, with an average positive surprise of 121.2% for the trailing four quarters, beating estimates all through.
3 Stocks to Ride a 588% Revenue Explosion
At Zacks, we're mostly focused on short-term profit cycles, but the hottest of all technology mega-trends is starting to take hold...
By last year, it was already generating $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for those who make the right trades early. See Zacks' Top 3 Stocks to Ride This Space >>