Project terminations, pricing pressure and deferrals will impact profitability and revenue.
COVID-19 will hit Infosys’ profitability and growth in FY21 as it sees project terminations, bankruptcy and pricing pressure from clients.
In a Securities and Exchanges Commission filing, Infosys said, "Many of our clients’ business operations have been negatively impacted due to the economic downturn, resulting in postponement, termination, suspension of some ongoing projects with us and/or reduced demand for our services and solutions."
While some of these risks materialised towards the end of FY20, Infosys said it will continue to impact in FY21, with more consequences.
Some of the clients may file for bankruptcy, which will affect the collection of revenues that are yet to be billed. "Our profitability may be marginally impacted as some clients may dispute some of the existing work-in-process that has been recognised by us as unbilled revenues. This, in turn, can impact our cash flows negatively,” the statement added.
The company is also anticipating client’s move to shift the outsourcing in-house to cut down spending, which could impact its operations.
In terms of geography too, the company is bracing for an impact as the economic slowdown or other factors may affect the economic health of markets such as the US, UK and the European Union (EU), where the company’s revenues are concentrated.
In fiscal 2020, 61.5 percent, 24.1 percent and 11.8 percent of the company’s revenues were derived from projects in North America, Europe and the rest of the world, respectively.
The virus outbreak has also impacted its key industries financial services industry, retail, consumer goods, energy and manufacturing. Financial services account for about 31.5 percent of the overall revenue. As the uncertainty around the economic growth remains, these likely to have an impact on its revenue and profitability.
All this forces the company to alter its internal offerings, talent mobility and marketing efforts need to capture opportunities in areas such as increased adoption of cloud-based offerings, digital services and cybersecurity services.
Wage pressures in India and the hiring of employees outside India are also likely to impact its margins.
“Although a vast majority of our current workforce is based in India, we have recently increased and expect to continue to increase hiring in other jurisdictions, including the US, UK, Continental Europe and Australia,” the company said.
“This increase has been driven, in part, by recent indications that immigration regulations in these countries could undergo significant changes. Such hiring has resulted and could further result in overall increased wage costs thereby impacting profitability,” the statement added.
The company also expects lawsuits from employees alleging potential health risks as they resume office operations. Delayed honouring of offers due to COVID-19 is likely to affect its brand negatively, the company said.