Our universe of six companies delivered a constant currency (CC) revenue growth of 2.3% q-o-q against our expectation of 1.4%.

Wipro (3.5% growth), HCL Tech (8.1% growth aided by acquisitions) were key outperformers while Tech Mahindra (de-growth of 3%), TCS (1.2% growth) were key underperformers.

All companies except for HCL Tech (1.4% growth) witnessed q-o-q decline in their reported dollar revenues due to cross-currency headwinds.

Average decline for our universe was 3.6% as the cross-currency movements impacted revenue growth by 5.9%. In rupee terms, aggregate revenues grew by 5.5% driven by unprecedented rupee depreciation v/s dollar.

Average volume growth for the universe at 1.8% q-o-q was in-line with our expectations of 2% growth. Wipro (2.2% growth) and Infosys (2% growth) reported volumes marginally ahead of estimates while Tech Mahindra (3% de-growth) disappointed.

This re-instates our belief that pricing decline would be a client-specific issue that might happen to some companies sooner and to some later. OPM of our universe stood at 26.2%, higher 55bps q-o-q. The expansion was significantly below our expectations of 150 bps.

Outlook

We believe that Indian software companies have entered one of the most difficult periods in their operating history, which might last for few quarters or couple of years.

Revenue visibility continues to get bleaker with increasing instances of project cancellations and deferral in scheduled ramp-ups. Even the revenue recognition on recent large deals won from marquee clients has been behind expectations.

Further, the pressure on margins is rising with increasing risk of sharp and sudden pricing cuts. We expect marginal revenue growth, 200-350 bps margin contraction and negligible earnings growth (degrowth for some) in FY10 for coverage companies.

Notwithstanding the deteriorated fundamentals, steep stock price correction and increased valuation discrepancies within the sector have made some companies (TCS, HCL Tech, Tech Mahindra and Infotech) a decent relative bet.

The rising uncertainty would continue to keep valuations under check though in the near-term.