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IT firms set for robust outlook as tech spending rises

IT firms set for robust outlook as tech spending rises
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First Published: Wed, Apr 13 2011. 10 21 AM IST
Updated: Wed, Apr 13 2011. 10 21 AM IST
Bangalore: India’s top three technology firms are likely to post strong quarterly profit and indicate robust revenue growth for the year ending March 2012 as overseas clients boost technology spending in an improving global economy.
However, salary increases and currency volatility could put pressure on margins for the country’s top software service exporters, Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Ltd.
“On the whole, this year will be better than last year. There may be some improvement in pricing and the business outlook will be slightly better than last year as the US market is improving,” said K.K. Mital, head of portfolio management services at Globe Capital in New Delhi.
“Wage inflation and the rupee’s appreciation will limit profit improvement.”
Companies could raise salaries by 10% to 15% on average this fiscal year, analysts said. However, some of them expect higher billing rates to offset the effect of salary increases on margins.
In April, research firm Forrester forecast the US technology market to expand 8% in 2011, up from 7.4% projected previously, with software, IT consulting services and technology outsourcing growing faster than last year.
The United States is the largest market for the Indian technology firms, contributing more than 50% of their revenue.
Investors will await management comments on the pipeline for deals, hiring targets and salary rises as Indian firms battle for contracts and employees with larger global rivals such as IBM, Accenture and Hewlett-Packard.
“We will have to see how these companies manage their margins this year,” said Srividhya Rajesh, vice president-equity at Sundaram Mutual. “We have to see if Infosys is willing to give up margin expansion for growth.”
The country’s top three technology firms, who manage computer networks and maintain IT operations for several Fortune 500 companies, are expected to see profit growth of 14% to 22% for the fourth-quarter ending March, according to a Reuters poll of analysts.
Revenue is seen rising 18% to 31% this fiscal.
Growth outlook
Infosys, which sets the tone for the near $60 billion outsourcing sector, opens the earnings parade on Friday and analysts expect India’s No. 2 software services exporter to forecast dollar revenue growth of 19% to 20% for fiscal 2011/12.
“The demand environment seems to be pretty good with the trend for offshoring continuing,” said Srividhya. “We are looking at pretty strong growth this year. It will be volume driven. We do expect to see some price increases this year.”
She expects Indian companies to secure 1-2% increase in billing rates this fiscal year beginning April.
Last month, TCS’ chief executive, N. Chandrasekaran, said he expects to “definitely” see an uptick in pricing in the current fiscal year, after prices rose in the October-December period for the first time in six quarters.
For the fiscal year ending March 2012, analysts on average are building in 20-25% revenue growth for the top three Indian software firms, who count among their clients Citigroup , General Electric and Cisco.
Strong results and outlook from global technology major Oracle and Accenture last month have added to the upbeat tone.
“The challenges this year will be to negotiate better pricing and entering new markets and how well they hedge against a weak dollar,” Mital said.
Indian software companies hedge some of their currency exposures but a chunk of their costs are in rupees and therefore appreciation of the local currency tends to squeeze margins.
Shares in Infosys, valued at about $42 billion, have lost 6% this year while Tata Consultancy has added 1% versus a 4.5% fall in the sector index and a 6% fall in the wider index.
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First Published: Wed, Apr 13 2011. 10 21 AM IST
More Topics: IT | Technology | TCS | Infosys | Wipro |