IT earnings to decline in Q4, say analysts

IT earnings to decline in Q4, say analysts
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First Published: Fri, Apr 10 2009. 01 21 AM IST

Updated: Fri, Apr 10 2009. 01 02 PM IST
Hyderabad: The January-March quarter may well have been the toughest three months ever for the country’s software industry, and the cracks could run deeper than previously estimated.
Fourth quarter (Q4) profits for the country’s biggest software firms—Tata Consultancy Services Ltd (TCS), Infosys Technologies Ltd and Wipro Ltd—are expected to decline over the preceding three months, based on a Mint poll of six analysts. And their revenue is seen either flat or slightly lower.
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Profits for bellwether Infosys and Wipro, the country’s second and third biggest software firms, respectively, are seen declining 3.6% on average over the December quarter, while earnings for TCS, the country’s biggest information technology (IT) firm, is expected to stay nearly flat at -0.85%. Infosys will announce its results on 15 April.
The three months to 31 March have seen lower technology spending by firms, especially in the US and Europe, project cancellations, pressure on prices, volatile currencies and India’s biggest corporate fraud in Satyam Computer Services Ltd , till recently the country’s fourth largest software firm.
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Analysts Surendra Goyal and Vishal Agarwal of Citigroup Global Markets Inc., referring to the three months as the “most challenging quarter for Indian IT till date”, write: “4Q (the fourth quarter) will be the first quarter of revenue declines (even in constant currency terms) across the board. Pricing should come under further pressure—a trend likely to continue over the next few quarters.”
Brokerage CLSA Asia-Pacific Markets expects TCS to report a 4.3% dip in net profit over the October-December quarter, while Angel Broking Ltd and Sharekhan Ltd see its earnings contract by 2.7% and 1.9%, respectively. And its revenue is expected to increase by an average of 0.7%.
As for Infosys, at least six brokerages expect a decline in net profit for the March quarter over the preceding three-month period. While Edelweiss Securities Ltd sees a 7.7% fall in earnings, Sharekhan sees a mere 0.9% slip. Revenue on average is seen declining 1.6%.
Citigroup sees Wipro’s Q4 profit rising 10% over the October-December period, while Motilal Oswal Securities Ltd sees it declining by 14% and CLSA by 9.6%. Sales are seen rising 0.5% on average.
“There have been occasional dips in the sequential growth of profit for top Indian IT firms in the past. However, none of those instances saw a comparative dip in sales revenue or business volume,” said an analyst with a Mumbai-based equity research firm on condition of anonymity. “The dips seen in the past were almost always on account of extreme currency movements or once-off exceptional events.”
Angel Broking said in a recent report that it “expect(s) the top-tier (IT) companies to report a 2-3% sequential decline in volumes along with a 1-3% sequential fall in pricing”.
“Our industry checks reveal that on-the-ground scenario remains unchanged. New projects are still hard to come by, while existing ones are being reorganized and moved offshore as far as possible,” BNP Paribas analysts Abhiram Eleswarapu and Avinash Singh say in their Q4 earnings preview titled What Price for No Growth .
Adding to the sector’s woes is the adverse movement of the British pound against the US dollar, which hit revenue reported in dollars.
The depreciating Indian rupee had some positive impact, but losses from the hedging positions of firms such as Wipro and HCL Technologies Ltd, which has replaced Satyam as India’s fourth biggest IT firm, dented these gains. Between 40% and 65% of the revenue of India’s top four IT firms is billed in dollars.
Infosys, which had a forward hedge position of $270 million (Rs1,350 crore today) as at end-December, was best placed to benefit from a depreciating rupee, while HCL, with a forward hedge position of $1.4 billion, would be the worst hit.
Analysts on average see HCL’s quarterly profit falling 33% from the preceding three months, but revenue rising 15% on the back of some recent global deals.
Meanwhile, the Bombay Stock Exchange’s IT index has gone up nearly 13% since January, beating the bellwether Sensex’s 12% rise.
Infosys’ share price has risen nearly 28% and TCS’ 26%. The Wipro stock has gained some 17% and HCL about 6%.
“The gains have been mostly in keeping with the general rally in Indian equities (in the past few days), rather than any sector-specific or company- specific reasons,” said Kunal Sangoi of Edelweiss. However, “commentary at the time of Q4 FY09 results of companies will continue to be laced with caution and thus should serve to roll back some of the impressive stock price gains”.
Graphics by Ahmed Raza Khan / Mint
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First Published: Fri, Apr 10 2009. 01 21 AM IST