Mumbai: First-quarter results for India’s largest software services companies are expected to exceed the most bullish markets estimates, reflecting a windfall from the weaking of the rupee against the US dollar and the euro.
Most analysts Mint spoke with said they are then also likely to raise their share price targets for the five largest information technologies companies—Tata Consultancy Services Ltd (TCS), Infosys Technologies Ltd, Wipro Ltd, HCL Technologies Ltd, and Satyam Computer Services Ltd.
Share prices of these companies, which outperformed India’s plunging equity index, the Sensex, since 30 March, could then extend their rally over the next few weeks, the analysts predicted.
“There will be upward revision in earnings estimates,” said Rishi Maheshwari, IT sector analyst at publicly traded brokerage firm, Centrum Capital Ltd.
Analysts are expecting 7-7.5% additional growth in revenue for most IT companies. The top software services firms bill most of their revenue in US dollars, which has appreciated 7.3% against the rupee since 30 March. The euro has appreciated 6.5%, in the same period.
“The change in currency value will definitely be helpful as dollar denominated revenues will get boosted,” said Amar Chintopanth, chief financial officer of 3i Infotech Ltd, a publicly traded mid-size IT company.
However, the business environment remains challenging for mid-cap IT companies and there could be a slowdown in growth later this year, he said.
Infosys, India’s IT bellwether and second-largest software services firm behind TCS in revenue, will be the first among the big five to announce its results for the April-June period, on 11 July.
Infosys stock, which saw a 26% run-up in its price since 30 March as against a 13.5% slump in Sensex, could witness a surge of sorts if the results are good.
“Infosys is expected to bring out strong numbers on Friday,” said Shahina Mukadam, head of equity research at IDBI Capital Market Services Ltd, the brokerage subsidiary of Industrial Development Bank of India Ltd.
While most other large software companies are also expected to do very well, mark-to-market losses booked by these companies from their currency hedging are still of some concern, said analysts.
The gains from the strengthening of the dollar could be offset by hedges taken at Rs 40 or so, said Anil Advani, head of equity research at SBI Capital Markets Ltd. V. Balakrishnan, chief financial officer of Infosys, declined to comment on the hedging issue ahead of results.
Infosys has the lowest currency hedges—about $700 million—among the five large IT companies, said analysts. On the other hand, Wipro has the highest, at about $3.5 billion, they said.
Satyam shares have gained 22% since 30 March, while TCS stock has increased 5%. Wipro gained 3.5% while HCL shed 3.6% during this period.
“Expectations for financial year 2009 were bottom-loaded,” said the head of equity research at a large foreign brokerage, who did not wish to be identified. The first two quarters were not expected to be good, he added. However, the results for the first quarter could force a revision in annual price estimates, he said.
A mid-April Mint analysis of share price targets set by analysts from a dozen domestic and foreign brokerages had indicated a huge difference of opinion for Infosys, ranging from a low of Rs1,341, by domestic brokerage India Infoline Ltd to a high of Rs2,160, set by Ajay Mathrani of Deutsche Bank.
Amar Ambani, head of research at India Infoline, had said that there was no room for Infosys to raise its guidance for fiscal 2009. Infosys had pegged the rupee’s value against the dollar at around Rs40 for its annual guidance.