Mumbai: The appreciating rupee, pay hikes and increased hiring to meet reviving global demand will likely dent the profitability of information technology (IT) companies that report their January-March financial results this month, analysts said.
Large or so-called tier-I firms such as Tata Consultancy Services Ltd (TCS), Infosys Technologies Ltd and Wipro Ltd are expected to report earnings growth of 3-5% from the three months ended December, they said.
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Infosys will declare its results for the March quarter on 13 April, followed by others.
The rupee appreciated 3.5% against the US dollar during the quarter, 9.5% against the British pound and 9.1% against the euro. This is likely to have hurt India’s export-led IT sector, which earns nearly 60% of its income from the US and around 20% from Europe.
Manpower costs are also rising as IT firms have begun hiring in large numbers and paying better salaries to retain employees in the face of mounting attrition.
TCS plans to hire 30,000 in the current fiscal year, while Infosys plans to hire around 24,000 in the calendar year. Multinational IT service provider Accenture Plc plans to hire around 8,000.
Overall, the sector is expected to hire around 150,000 in 2010-11, according to industry lobby Nasscom.
“We believe that although fresh graduates are available for hiring, which contributes 20-25% of employee strength, the strong pickup in lateral hiring (of experienced workers from other companies) would be followed by wage inflation,” said Shashi Bhushan, analyst with Mumbai based brokerage Prabhudas Lilladher Pvt. Ltd. “We expect wage inflation to trouble Indian IT companies in the next two-three quarters.”
Firms need to be ready to meet an expected surge in global demand for IT services as large corporations emerging from the economic slowdown look to contain costs by offshoring more work to cheaper destinations, such as India.
“A whole lot of corporations that are household names in the US and which have not previously considered outsourcing as an option are now getting ready to do it,” said Sid Pai, managing director at TPI Advisory Services India Pvt. Ltd, the Indian arm of global outsourcing advisory TPI.
“We expect to see a lot of these offshoring contracts, which have been in protracted discussions for some time now, to be closed in the near future,” Pai said.
Some analysts also predict the Indian IT industry will witness demand from new markets, and for new services.
“Our 20%-plus growth expectations for the next two-three years are underpinned by a secular pickup in offshoring in under-penetrated markets like continental Europe and services like remote management services,” noted Yogesh Aggarwal and Atul Agrawal, analysts with HSBC Securities and Capital Markets (India) Pvt. Ltd, in their 25 March update on the outlook for the Indian IT sector.
But Pankaj Kapoor and Srinivas Seshadri, analysts with RBS Equities (India) Ltd, cautioned that demand revival in Europe is still lagging compared with the US, in their 30 March report on the Indian IT sector.
Analysts at a recent technology conference hosted in the US by global financial services firm Goldman Sachs Group Inc. had also pointed out that recovery in Europe is still sluggish compared with the US.
“At this point, we know that Europe will trail the US by about 6-12 months given the lagging nature of its recovery. That said, the key leading indicators, including major sequential trends in utilization, new headcount additions, pipeline activity, offshore efforts and pricing, were pointing to the right direction, but would not convert to growth until 2H2010 (second half of 2010),” the analysts noted in a 20 March report.
These dynamics, analysts argue, will strain IT companies’ abilities to maintain profitability in the short term.
“We are looking forward to the comments of frontline companies on how they plan to maintain their margins, considering wage hike (planned in April 2010) and rupee appreciation-related concerns,” said the latest sector report from Mumbai-based brokerage Sharekhan Ltd.
Graphic by Ahmed Raza Khan / Mint