By Anil Penna/AFP
India’s second largest software maker Infosys Technologies is this week expected to confirm analysts’ fears that the country’s flagship industry is facing tougher times.
With wages rising 15% a year, an appreciating rupee that cuts into export earnings, a looming slowdown in technology spending by US companies and a higher tax burden, the 48-billion-dollar industry is facing a concerted assault, analysts say.
Bangalore-based Infosys’ forecasts for the year to next 31 March, and the reasoning they are based on, are set to be reported on 13 April, reflecting the wider trend for the industry.
“We will look at the guidance Infosys provides as an indication of the software demand environment, based on the IT budgets of its clients and billing rates,” said Harmendra Gandhi, vice president of research at Mumbai-based Brics Securities.
“We will look at the dollar guidance, wage inflation and their impact on margins,” added Gandhi, who has already lowered his earnings estimate for Infosys and other IT companies because of the rising rupee.
“The expectation is that whatever Infosys does, the others can only do less,” he said.Infosys, founded by software professional N.R. Narayana Murthy in 1981 with Rs10,000 (225 dollars) of capital, will be the first of India’s big four software makers to report fourth-quarter earnings and provide forecasts.
Analysts expect Infosys, once billed as India’s Microsoft, to still maintain profit growth in excess of 50% from a year earlier, with CLSA Asia-Pacific forecasting earnings of Rs12.28 billion (286.6 million dollars) for the quarter. But there are fears the industry is losing its lustre.
“So far strong growth has been assured in techs but recent data points to some softening,” CLSA analysts warned in a research note to clients.Expectations from Infosys’ forecasts for the next fiscal year have been diminished by the rupee’s appreciation and a tax levied on stock options gifted to programmers by software makers, the investment house said.
The rupee gained 1.8% against the dollar in the quarter ended 31 March, and a further 1% since then, denting the dollar-denominated earnings of software exporters who derive 75% of revenue abroad.The currency has risen 9% since July 2006.
Concern about its impact led investors to drive down the share prices of software makers, and a lower sales and profit forecast by Infosys could be the trigger for another wave of selling.
“Guidance, especially from Infosys, will decide the near-term movement of IT stocks,” Kotak Mahindra analysts Dipen Shah and Saurabh Gurnurkar wrote in a report.
The company’s forecasts will likely be conservative, leaving room for expectations to be bettered in the year ahead, they said.The earnings reports of bigger rival Tata Consultancy and the third and fourth biggest, Wipro and Satyam Computer Services, will follow later this month.
Indian software makers, who have leveraged an ample talent pool and relatively low costs to win business abroad, have been hearing warnings their competitive edge is being blunted by rising wages.
Typically, wages account for half the spending by software makers, who are giving bigger raises to keep employees from being poached by rivals amid a shortage of skilled personnel.
“Wage inflation is linked to the war for talent,” said Kaushal Sampat, chief operating officer of Dun and Bradstreet, a US financial information provider, in a recent interview. “There’s a huge talent gap in the industry.”