Infosys to 'ramp-down' 3,000 people post fallout of RBS deal

The project cancellation can 'severely impact' the IT firm's growth momentum in the upcoming September and December quarters, says brokerage house CLSA

Debojyoti Ghosh
Published: Aug 16, 2016 05:07:43 PM IST
Updated: Aug 16, 2016 06:12:26 PM IST
Infosys to 'ramp-down' 3,000 people post fallout of RBS deal
Image: Vivek Prakash / Reuters
In July, Infosys lowered its FY17 dollar revenue guidance to 10.5-12 percent from its earlier forecast of 11.5-13.5 percent in constant currency terms

The fate of nearly 3,000 employees (primarily in India) of IT major Infosys is in question, following Royal Bank of Scotland’s (RBS) decision earlier this month to scrap the idea of setting up a new retail bank, Williams & Glyn (W&G), in the UK.

Infosys had been selected as a W&G project technology partner for consulting, application delivery and testing services. In 2013, Infosys bagged a major chunk of a five-year 300-million pound contract from RBS, which included the W&G business, along with tech giant IBM.

“Subsequent to this decision, [we] will carry out an orderly ramp-down of about 3,000 persons, primarily in India, over the next few months,” Infosys said in a statement posted on its website. The Bengaluru-based software-services company, however, did not clarify how it plans to utilise the 3,000 employees affected due to the cancellation of the W&G project.

“The 3,000 employees will translate into an annual revenue loss of approximately $150-$160 million for Infosys which is about 1.5 percent of its total revenue,” said Dinesh Goel, partner & India head at international advisory firm ISG. Goel though believes that this loss may be offset by some “reasonable amount of settlement” from RBS. In general, such announcements result in a higher degree of caution by IT firms when they share their annual revenue guidance. Typically, Infosys issues a full-year guidance in the last quarter of every financial year.

In July, Infosys lowered its FY17 dollar revenue guidance to 10.5-12 percent from its earlier forecast of 11.5-13.5 percent in constant currency terms.

According to a report by Hong Kong-based brokerage firm CLSA, the loss of the W&G project could impact Infosys's FY17 revenue by $50-$100 million and FY18 revenue by $100-$200 million. “While Infosys is attempting to compensate for this loss with other contracts at RBS, market conditions and the extent of the loss are likely to make this tougher,” read the report.

CLSA, in its report, further pointed out that the project cancellation can “severely impact” the IT firm’s growth momentum in the forthcoming September and December quarters of the ongoing financial year. “The impact on margins can be higher as Infosys will have to work through an air pocket of excess inventory from the 3,000 staff released and reverse its recent lateral hires.”

This development also follows Britain's decision in June to exit the European Union, which has caused volatility in business sentiments in the region. For Indian IT companies, Europe constitutes the second-largest market after the US with Britain accounting for the biggest chunk of the revenue from the European region. Goel feels, while it will take time for any impact of Brexit to play out in the industry, it has set in motion a general mood of caution apart from currency impact in the immediate term.

Shares of Infosys closed at Rs 1050.95, down by 1.16 percent, on the Bombay Stock Exchange on Tuesday. The sensitive index, Sensex, ended the day marginally down by 0.31 percent.

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