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Rising rupee, wages may crimp first-quarter profits

Rising rupee, wages may crimp first-quarter profits
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First Published: Fri, Jul 06 2007. 12 17 AM IST

Updated: Fri, Jul 06 2007. 12 17 AM IST
Bangalore: India’s top three software service vendors, Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Ltd, are likely to announce fiscal first quarter results that reflect the continuing, dual impact of a strengthening rupee and higher wage costs on profit margins.
The effects of a rising rupee, which appreciated by 6.6% in the April-June period against the US dollar, the currency in which Indian companies bill two of every three customers, and other costs are expected to result in a sharp Ebitda margin decline of as much as 4% calculated on a sequential or quarter-on-quarter basis, Citigroup equity analysts Surendra Goyal and Hitesh Shah wrote in a report on 1 July. Ebitda stands for earnings before interest, depreciation, tax and amortization.
As for the bottom line, profit will shrink nearly 18% sequentially in the quarter for Infosys, India’s second largest software company, to Rs939.40 crore on revenues of Rs3,821.90 crore, the Citigroup analysts predict. Even on a year-on-year basis, the April-June quarter’s net profit growth will be just 17.4%—one of the lowest bottomline expansions in the recent past.
Infosys will be the first major technology companies to declare results on 11 July.
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Infosys, which had factored Rs43.1 for each US dollar in its original annual guidance, “may do a downward revision in future guidance as the rupee has strengthened by almost 5.5% since then,” Citigroup’s Goyal and Shah wrote.
Moreover, TCS, Infosys and Wipro are also expected to be impacted by the wage hikes for their workers this quarter, which is traditionally a weak three months for the tech services industry.
Analysts at other investment houses, including UBS, CLSA, Edelweiss Capital, Mann Financial and Pranav Securities, claimed they were not yet ready with their individual company estimates.
None of the tech companies can comment on such assessments because they are all in what is known as the “quiet period” ahead of formally reporting their results.
But Kiran Karnik, president of trade body National Association of Software and Services Companies, or Nasscom, said on Monday that the pace at which the rupee has been appreciating “is too much, too fast, and a cause of concern for the industry”.
Software revenues of Indian vendors are predicted to reach $50 billion (Rs2.05 trillion) this year, buoyed by a strong demand for application development, maintenance and business process outsourcing from western enterprises such as General Motors Corp., British Telecom Plc. and General Electric Corp.
While the outlook for outsourced services remains strong and tech vendors may revise upward revenue growth guidance in dollar terms, “we expect the rupee revenue growth to be muted (around 3%) during the quarter,” said Harmendra Gandhi, an equity analyst with Mumbai-based Brics Securities, in a telephone interview. Gandhi had a marginally higher prediction for Infosys in the quarter: Rs1,018 crore net profits on revenues of Rs3,906 crore.
TCS and Infosys could be the worse affected because wage hikes—in the range of 15% to 20%—have been announced in the companies, putting further pressure on margins.
“While TCS could be impacted by around 300 basis points, Infosys would see a 270 basis point impact on its margins because both these companies hiked the salary of their employees in India this quarter,” Pankaj Kapoor, who covers tech stocks at ABN Amro India, said in a telephone interview. A basis point is one-hundredth of a percentage point.
Executives at TCS, India’s largest software exporter, said in a May interview that the rising rupee could impact margins by almost 2.5% this quarter as the dollar had depreciated by nearly 9% since the beginning of the year. TCS chief financial officer S. Mahalingam called the quarter a “killer cycle”, adding the company had maintained a $1.5 billion currency hedge for two years. He added that for every percentage drop in the dollar-rupee exchange rates, there is an impact of around 40 basis points on the firm’s margins.
Citigroup expects TCS to post Rs1,080.3 crore in net profits on revenues of Rs5,209.6 crore for the April-June quarter, representing a near 8% contraction of the bottom line quarter on quarter. Wipro, ranked No. 3 among Indian tech vendors, will likely post Rs782.2 crore quarterly net profit, more than 9% less than the profits for the January-March period; revenues will also be likely 3.8% less in the latest quarter at Rs4,167.7 crore.
Yet, analysts said, the companies would mitigate margin pressures by increasing efficiency of operations through better utilization of its workforce and higher billing rates for services, analysts predicted. “We expect Infosys and Wipro to improve their utilization rates by 3% during the quarter, contributing to almost 160 basis points to the margins,” Gandhi wrote in a report last month.
Citigroup’s Goyal and Shah wrote that Infosys and TCS were “best placed in terms of margin levers (and)... with low expectations and good business momentum, HCL Technologies Ltd could spring a positive surprise.”
Infosys, which had employee utilization (the number of employees working on revenue-making projects as a percentage of total workforce) of 73% in the quarter ended March, has room to increase worker productivity since it has delivered more than 80% utilization levels in the past.
Citigroup expects “consulting losses to come down (resulting in a) 50 basis points margin leverage,” the analysts wrote.
With pricing improving, revenue per employee could also increase at the 3% to 4% rate increase seen in fiscal 2006, they added.
Other companies such as TCS and Satyam Computer Services Ltd, too, may hike their billing rates, other analysts said. Satyam reports results on 20 July.
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First Published: Fri, Jul 06 2007. 12 17 AM IST
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