IT cos likely to do better in Q2

IT cos likely to do better in Q2
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First Published: Tue, Oct 09 2007. 01 17 AM IST
Updated: Tue, Oct 09 2007. 01 17 AM IST
Results of top software companies for the September quarter are expected to be much better than their performance in the June quarter. Core operating profit had fallen by around 9-10% sequentially for Tata Consultancy Services Ltd and Infosys Technologies Ltd in the June quarter. But core earnings could rebound by about 10% for these companies in the September quarter, analysts say, owing to a much lower appreciation in the rupee and because the impact of wage hikes and visa costs is the maximum in the June quarter.
The rupee had appreciated by around 7% in the June quarter compared with the preceding quarter. Average daily rates for the rupee last quarter, however, signal an appreciation of just 1.8%. The impact on profitability, therefore, would be much lower on a sequential basis. Much of this should be offset by productivity gains. What’s more, based on quarter-end rates, there has been an appreciation of 2.3%, which means there would be reasonable gains on hedging positions. It must be noted that most companies had increased their hedges in the recent past owing to the rapid depreciation in the currency. While some of the gains from hedging would be offset by the losses on account of translation of the foreign currency receivables, net earnings are by and large expected to grow. Companies such as Satyam Computer Services Ltd would, however, take a hit as their wage hikes come into effect only in the September quarter. Motilal Oswal Securities Ltd expects Satyam’s operating profit to decline 4% sequentially, which actually isn’t a bad deal considering that the company’s earnings had remained flat in the June quarter, at a time when most players had witnessed a sharp drop in profit.
But while the industry’s results are likely to look decent based on a quarter-on-quarter comparison, it’s important to look at the year-on-year performance since this would give a better indication of what the rupee’s appreciation has done to the fundamentals of IT companies. On a y-o-y basis, the rupee has appreciated by about 13%, which would impact margins of most companies by about 500 basis points. In the case of mid-cap software companies and BPO firms, which work on relatively lower margins, the drop in profit would be much larger. It’s no wonder many mid-cap IT stocks are trading near 52-week lows.
The markets would also keenly look for indications by company managements on IT spending patterns by top clients and the ability to take price increases to offset the rupee impact. If companies such as Infosys do not raise their dollar-based revenue guidance, that would crush the hopes of analysts who believe that demand growth would offset a large part of the impact of the rupee. Given the underperformance of most IT stocks in the recent past, it would seem like the negatives are priced in. But negative feedback on demand outlook could dent valuations further.
The last few years have seen a sharp increase in the indebtedness of Indian households, partly because of low interest rates and partly because of changes in lifestyles and aspirations. But has that become a problem? The Reserve Bank of India’s data on changes in the financial liabilities of the household sector show that household indebtedness went up by a huge 54.9% in 2007 compared with the previous year. And this sizzling growth rate was achieved on top of a rise of 50.5% in 2006. In 2005, the growth rate was even higher, at 72.2%.
Most of these loans have been taken from banks and bank advances accounted for 96.8% of total household financial liabilities. That’s up from 82.7% of total liabilities in 2004 and is a reflection of banks increasingly going in for retail finance. As a matter of fact, the proportion of bank loans in household liabilities has been pretty steady (it was 80% in 1990-91) and it is only in the last three years that the proportion has gone up.
Loans taken by households from the government have actually been negative in the last two years, which perhaps means that repayments have been higher than new loans. But surely incomes, too, have gone up, thanks to the boom of the last few years and borrowers can, therefore, take on more debt? One way of measuring that is to consider changes in financial liabilities as a percentage of changes in the financial assets of the household sector. In 2007, the rise in liabilities was 37% of the rise in household assets.
That’s an indication that while people may be borrowing more, they can also afford to borrow more. Of course, people are leveraging their assets, which is why the percentage of rise in liabilities to the increase in household assets is going up. It was 15.3% at the turn of the century, 18.7% in 2002-03 and 30.5% in 2005-06. But servicing the debt is not a problem. That’s easily seen from the fact that, in spite of the rise in household borrowing in the last few years, changes in liabilities of the household sector formed just 7.5% of gross domestic product at factor cost in 2007.
Write to us at marktomarket@livemint.com
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First Published: Tue, Oct 09 2007. 01 17 AM IST
More Topics: IT | Q2 | rupee appreciation | Money Matters | Equities |