Bangalore: India’s top software services companies should report a 10-25% rise in quarterly earnings on the back of higher outsourcing business from Western clients, but wage increases and a stronger rupee will have dented margins.
Analysts are bracing for a slowdown in earnings growth, and will be watching if companies lower their forecasts even though the outlook for new outsourcing contracts remains buoyant.
The rupee, which rose 6.8% against the dollar in the June quarter to 40.72, poses a big problem for software services exporters that get more than 60% of their revenue from the United States.
Every 1% rise in the value of the rupee against the dollar shaves 30-50 basis points from operating margins of Indian software services exporters, analysts said.
This would have lowered the net profit of top companies by 1-15% in the three months ended June 2007 from the March quarter, they said, with wage rises and costs related to getting US visas for work permits at client sites.
Analysts at Westpac Bank expect the rupee to rally further to 39.4 per dollar by the end of the year.
Even so, margins for the top software companies are still well in the double digits, and over 20% for the top three exporters.
Infosys Technologies Ltd, which kicks off the results on 11 June, is expected to post net profit rose 21.2% in the fiscal first-quarter ended June from a year earlier, according to a Reuters poll of 10 analysts.
Compared with the March quarter, the estimate will be 15.3% down, it showed.
“The June quarter was definitely a very difficult quarter for all the software companies,” said Tejas Doshi, a sector analyst with Mumbai brokerage Sushil Finance.
“Most of the firms give wage hikes in the first quarter. On top of it, the sharp rupee appreciation has come as a major blow for all. The pressure on margins will definitely be there.”
Wages in the sector are rising by about 10 to 15% a year, compared with 2-6% the West, as companies try to retain staff from being poached by rivals such as IBM and Accenture.
Tata Consultancy Services , India’s top software exporter, is expected to post 25% rise in quarterly earnings on 16 July, followed by number-three Wipro up 22.3% on July 19.
India’s booming software services industry has been winning large outsourcing business from overseas clients like ABN AMRO , Airbus , and Qantas but growth is expected to slow.
Last week, an industry body forecast software services exports would rise 26-29% to around $40 billion in the fiscal year to March 2008, slower than a 33% rise in 2006-07.
“While operationally we expect positive comments by companies in terms of volume growth, guidance in US dollar terms and pipeline, the street focus, in our view, would continue to be on the rupee movement,” SSKI India Research said in a report.
The rupee has risen more than 9% against the dollar in 2007, propelled by rising foreign investment in the fast-growing economy. This reduces the amount of rupees that exporters get when dollar earnings are converted.
Infosys shares fell 4% in the June quarter, while Tata Consultancy lost 6.7% and Wipro shed 7% . All were weighed down by foreign exchange and margin pressure concerns.
In comparison, the sector index dropped 0.6% while the main BSE index rose 12%.
But analysts said the drop in prices offered opportunities for investors.
“Business momentum continues to be strong with pricing on an uptrend... reasonable valuations provide a good entry point for long-term investors,” Surendra Goyal and Hitesh Shah wrote in a Citigroup research report.