As stock markets wait expectantly for the year-end results of India’s tech vendors, the subjects of investor attention are busy grappling with consolidation among key customers, wage hikes and a strengthening rupee against the US dollar, which is the currency they bill most of their clients in.
Yet the outlook from analysts for the performance of the companies in the financial year just gone by remains positive, given the big growth in demand for the services they offer.
Infosys Technologies, a bellwether stock that sets the tone for the mood on stock markets almost every quarter, announces results on 13 April. The vendor, headed out of Bangalore, is the country’s second-biggest software services company.
Tech services market leader Tata Consultancy Services is slated to unveil results on 16 April, and Wipro, No. 3 in the industry, on 20 April.
The trio has grown in size and scale to records and any impact on their revenues will set the momentum for the $23 billion (Rs99,000 crore) software exports the industry, which has more than 700 companies, is expected to make in fiscal 2007, says tech researcher Forrester Research.
TCS, Infosys and Wipro will account for some $9.5 billion software exports, accounting for 41% of the total.
In 2005, they accounted for just over a quarter. Including exports of back-office work for domestic and international clients and tech services for Indian customers, the industry touched nearly $48 billion in the financial year gone by.
The performance of the rupee will be crucial to the company fortunes, predict analysts. A 1% rupee swing could impact operating margins by up to 0.5% for Indian tech vendors, says Ashish Thadani, an equity analyst with the New York-based Gilford Securities Inc., depending on the level of rupee-denominated expenses.
Even as many companies such as General Electric Co, General Motors Corp and Citibank Corp. continue to send more software projects to India for leveraging lower costs, the salary levels at leading Indian companies have risen by around 15% in 2006, impacting margins of many software exporters.
According to a Dun & Bradstreet survey, salaries of software workers will rise by 15-20% in 2007, making it one of the challenging issues for many software exporters.
“Attrition, which is a key indicator of rising wages, has translated into 300 basis points of margin pressure annually,” Thadani wrote in a March report.
The recent introduction of minimum alternate tax is also threatening to have a negative impact, as “it could have an impact of anywhere between 1% and 5% on IT companies’ earnings,” says an analyst who did not wish to be quoted. This impact will also depend on a company’s exposure to offshore revenues, which usually account for around 40-70% of the total revenues.
Many company-specific issues are gaining momentum as well. TCS’ UK subsidiary Diligenta, which came into existence after the former acquired the business process outsourcing business from insurer Pearl Group, was yet to become profitable the last quarter.
“The company had mentioned that Diligenta will be clocking 9-10% profitability by 2007, and that’s something we would be keenly watching,” says Pankaj Kapoor, equity analyst with Mumbai-based ABN Amro Research.
Other analysts say they will also look for pricing and other broader industry trends in the TCS fourth-quarter earnings.
At Infosys, a rethink of more than $100 million outsourcing deal from Dutch lender ABN Amro Bank because of a possible merger with UK-based Barclays Plc. is a cause of concern. “We will get to know more about the ABN deal in the coming quarters; there are other issues such as its growth in British Telecom deal that we need to understand about Infosys this year,” says the analyst who sought anonymity.
Infosys’ desire to move into the consulting domain by establishing Infosys Consulting, with an eye on premium billing rates (up to double of a typical application development project), will also be keenly watched.
Infosys had given a guidance last year that it would be having around 500 professionals in the consulting business by 2007.
Wipro, which gave a guidance to achieve $685 million in quarter to 31 March, may see some impact on its revenues from the services it provides the telecom industry, as key clients Alcatel and Lucent completed their merger in November 2006 and have begun the process of restructuring product lines and their research and development operations across global centres.
Finland-based Nokia and German telecom vendor Siemens, who outsource software work to Wipro, also announced that they would merge their network equipment businesses by the first quarter of 2007.
“The company has been maintaining since April last that it would have better clarity on telecom consolidation; we expect to hear something on that front during results,” Kapoor said.
Wipro, which said that it will resume its talks with new product groups at Alcatel-Lucent this quarter, gets around 22% of its total revenues from the telecom segment by serving customers such as Alcatel, Lucent and Nokia.
On the demand side, however, analysts continue to be bullish.
“Apart from a very strong demand environment in the US, TCS and others have already moved into other geographies such as Europe, bringing large contracts,” says Joseph Foresi, an analyst at Janney Montgomery Scott, a Boston investment firm.
The US tech spending, which is expected to be down by around 4% in 2007, according to Forrester, may actually lead to more offshoring of software projects to Indian vendors.
“When IT budgets are under pressure, it’s always a good news for Indian IT vendors, as these enterprises would seek to reduce expenses by sending more work overseas,” Sudin Apte, country manager of Forrester Research India, says.