In a big hit to Infosys, the Royal Bank of Scotland (RBS) has cancelled a major contract that will impact as many as 3,000 of Infosys’ employees and impact revenues for the year by about $40 million.
The cancellation came following RBS’ decision to abandon its plan to float a separate standalone UK bank -Williams & Glyn (W&G). RBS had awarded a five-year 300-million-euro IT contract to Infosys and IBM for W&G. The major portion of that, may be as much as $200 million, was to go to Infosys.
“Infosys has been a W&G program technology partner for Consulting, Application Delivery and Testing services, and subsequent to this decision, will carry out an orderly ramp-down of about 3,000 persons, primarily in India, over the next few months,” ET report quoted the Infosys statement.
“RBS is a key relationship for Infosys and the company looks forward to further strengthening our strategic partnership and working with them across other strategic and transformation programs,” the IT firm added.
Though Infosys did not specify the quantum of impact on revenue, some analysts, who did not want to be named, estimated it at around $40-50 million for the current year.
The cancellation of the deal is likely to hit Infosys revenue and earnings per share during the current fiscal year, analysts said.
“Our calculations suggest that this could impact FY17 revenue by $50-100 million and FY18 by $100-200 million. While Infosys is attempting to compensate for this loss with other contracts of RBS, market conditions and the extent of the loss are likely to make this tougher,” said brokerage CLSA.
The loss of the five-year 300-million pound RBS deal could force Infosys to downgrade its FY17 revenue guidance for the second time this year, analysts said. Infosys had in July cut its annual sales outlook citing weak demand, which triggered a selloff in the stock. Infosys shares are down 10 per cent since July 14.
“As this cancellation happened after Infosys’ 1Q17 results, it puts its FY17 revenue guidance of 10-11.5 per cent US dollar at risk by 0.5-1 per cent and can severely impact its growth momentum in September and December 2016 quarters,” said CLSA.
However, analysts told NDTV Profit that the weakness in Infosys shares is a good opportunity to accumulate the stock.
“The RBS deal accounts for just 0.4 per cent of Infosys’ consolidated revenue… These are all normal business events, one should not give too much importance,” said G Chokkalingam of Equinomics Research & Advisory.
SV Prasad of Chime Consulting said Infosys is the counter one should buy for exposure in the IT space. “Whenever it bounces, it bounces back very well,” he added.