Major, new markets show encouraging signs; clients receptive, say analysts

Despite being a seasonally slow quarter, the third quarter (October-December) numbers of Tier-I information technology companies for 2010-11 are expected to log a volume growth in the range of 5.5 to 7 per cent and revenue growth of 6 to 8 per cent (dollar terms), said analysts.

While the demand environment has been witnessing strong traction, growth in volume will be due to increased spending by the banking, financial services and insurance, retail and healthcare sectors. More, while the major market, the US, is looking at outsourcing as a driver to bring in cost efficiencies, the European market is also opening to outsourcing and offshoring.
However, an appreciating rupee and lateral hiring will see a marginal impact on margins, said an analyst. The rupee has appreciated by 3.6 per cent on a quarter-on-quarter basis and this is likely to lead to a 120-200 basis points decrease in operating margins.

Meanwhile, the dollar has depreciated against the euro and the pound by about 5.25 per cent and 1.9 per cent, respectively. This is expected to impact positively the sequential revenue growth (in US dollar terms) for companies, depending on the proportion of revenues earned in these currencies.

“On an average, the rupee has appreciated against the dollar (3.5 per cent) and pound (1.7 per cent), while depreciating against the euro (1.6 per cent). This is expected to nullify some of the benefits accruing from the cross-currency movements. The overall impact of currency movements should result in about two per cent loss in revenues for the top three companies,” said Dipen Shah of Kotak Securities.

Bangalore-based Infosys Technologies, which will be the first to announce its numbers, is expected to report a revenue growth (dollar terms) of five to seven per cent sequentially. But will see a marginal decline to growth in margins due to operational efficiencies and despite the rupee appreciation. “Infosys is expected to do better this quarter. For the last two quarters, TCS (Tata Consultancy Services) has been doing better than Infosys on margins. Infosys will play the catch-up game,” said an analyst from a leading brokerage firm.

“On US dollar revenues, we expect Infosys to raise its 2010-11 guidance by around one per cent on the back of better volume growth. We expect Infosys to clock 27 per cent and around 13 per cent year-on-year growth in dollar revenues and EPS (earnings per share), respectively, in FY11,” said Hitesh Shah and Anamika Sharma of IDFC Institutional Securities in their report.

TCS, the largest IT services firm, that has been delivering better-than-expected results and beating peers on several parameters for the past two quarters, is expected to see its margins falter. “TCS margins will see a decline of 100 bps in margins due to rupee appreciation and certain one-off tax reversal benefits that the company had in Q2 (second quarter) of FY11,” said Citigroup Global Markets’ research.

Meanwhile, Wipro’s IT business is expected to log revenue growth of around four per cent. The company had guided for a revenue growth of 3.5-5.5 per cent growth. “Wipro is expected to record a 110-bp quarter on quarter expansion in Ebit margins for the IT services segment on the back of better utilisations,” said Srishti Anand and Ankita Somani of Angel Broking.

Analysts will keenly await the commentary from Infosys’ management on client budgetary spends. Other than the IT spend comments, the market would like to focus on pick-up in discretionary spending, pricing outlook and attrition management.

“Pricing for tier-I companies has remained stable on a like to like basis, with recent rate improvements being mainly driven by change in the business mix on the back of increased discretionary spend. Our conversation with the managements suggest clients increased receptiveness towards pricing re-negotiations. While across the board pricing increases are distant, rate increases in pockets and discount reversals are realisable in FY12,” said Anirudda Mehta, Research Analyst, IIFL.

The optimism in IT spend is also due to some of the positive macro movements. For instance, November 2010 US data, says the Angel Broking report, shows capacity utilisation firming up to 75.2 per cent v/s 74.9 per cent in October 2010. Retail sales continue to grow at 7.7 per cent year-on-year in November, personal income growth sustains at 3.8 per cent and durable goods orders’ growth is expanding to 10.4 per cent.

Source:http://www.business-standard.com/india/news/dec-quarter-it-results-to-be-better-despite-seasonal-weakness/421048/