While India’s leading software companies are set to announce impressive earnings growth this week thanks to a strong dollar, analysts and investors say they will be listening for clues to whether the good times can continue if the rupee rebounds.
India’s top information technology software and outsourcing companies, Tata Consultancy Services Ltd., Infosys Ltd. and Wipro Ltd., are all scheduled this week to announce their earnings for the quarter ended March 31. As it is the last quarter of the fiscal year some are also expected to give more guidance on what will they think might happen this fiscal year.
While the industry has been expanding healthily–the year just ended will be the best in three years in terms of growth according to some estimates—much of the recent progress can be attributed to the rupee’s decline against the dollar. A weak rupee makes India companies more competitive and it inflates the rupee value of the billions of dollars they make abroad.
For India’s top outsourcers to keep the pace of growth high, they need to diversify into new and higher-margin businesses as they to continue to find more customers in the U.S. and Europe as those economies recover.
“The economic environment in major markets has improved,” said Shashi Bhusan, senior analyst with Mumbai-based brokerage Prabhudas Lilladher. “There is no doubt that recovery in the U.S. is strong and steady.”
The days of easy growth may be coming to an end, some analysts warn, as the rupee gathers strength against the dollar. The rupee rose around 4% against the dollar in the last two months and is expected to rise further.
Still most analysts are optimistic that even without the currency crutch, India’s software industry can clock another strong year. While some of the leaders of the sector may project single digit expansion for the year, the broader industry is expected to grow its dollar revenues as much as 15% in the fiscal year just started this month.
Tata Consultancy has already said that this fiscal year is looking better than last year though it has not projected what kind of growth that will mean. Analysts expect Infosys this week to give a conservative forecast for dollar revenue growth of less than 10% for the fiscal year. Wipro, which only gives quarterly forecasts, may be even more cautious and project 3% to 5% dollar revenue growth for this quarter.
Bangalore-based Infosys is first up to announce its earnings on Tuesday. On average six analysts polled by The Wall Street Journal predicted the company’s net profit grew 20% in the three months ended March 31, from a year earlier to 28.63 billion rupees ($476 million), while its revenue increased 24% to 129.38 billion rupees.
Most analysts predict Infosys to announce a weak revenue growth forecast this fiscal year as it has failed to meet its own targets for the past two years.
“Uncertainty about Infosys’ guidance and commentary is becoming as big an issue as the underperformance of the company itself,” Mumbai-based brokerage IIFL Capital said in a note.
Tata Consultancy reports earnings on Wednesday. Analysts on average said its net profits probably grew to 52.56 billion rupees last quarter, a 46% jump from a year earlier, as its revenues increased 32% to 216.65 billion rupees. Tata has outperformed its peers, analysts said, because it has been better than others at keeping costs down.
Wipro Ltd. reports on Thursday, and is expected to announce profits of 21.34 billion rupees, a year-on-year growth of 23.4%. Revenue likely grew 22% to 117 billion rupees.