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Cross-currency rates to be the main focus for IT companies

Cross-currency rates to be the main focus for IT companies
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First Published: Sun, Jan 10 2010. 09 18 PM IST

Updated: Sun, Jan 10 2010. 09 18 PM IST
We expect the top six information technology (IT) companies to report sequentially flattish rupee revenue and a 2.5-5% growth in dollar revenue, with net profit sliding 2.3%. Margins are likely to be sequentially lower with the top six likely to report a 93 basis points slide.
In the December-ending quarter, the average Re/$ conversion rate was 46.60 against 48.40 for the September-ending quarter. Tech Mahindra Ltd would be hurt the most because of its greater billing in pounds.
But as pricing pressure has eased, we expect a benefit of about 0.5-1% due to favourable cross-currency movements. In line with our expectation, we have factored in a flat to minor rise in pricing rate assumptions across the board. Our assumptions clearly indicate the stability of pricing rates.
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On the volume front, we have factored in increases for all the companies.
Infosys Technologies Ltd, Tata Consultancy Services Ltd (TCS) and Wipro Ltd, due to better traction among its existing and new clients, HCL Technologies Ltd (due to aggressive pricing) and MphasiS Ltd (strong pipeline support from its parent). Tech Mahindra is expected to show growth on account of the lower base. Our view is that volume growth would lead the demand recovery cycle. Also, traction from existing clients is much better.
TCS and HCL Tech are likely to show better year-on-year growth on account of their acquisitions. For the third quarter of FY10, we expect TCS’ inorganic growth to be $71 million (from Citi-BPO, flat sequentially). In the case of HCL Tech, an unfavourable pound movement would dampen inorganic sequential growth on account of HCL Axon. Polaris Software Lab Ltd is expected to show an 11% quarter-on-quarter growth in domestic sales due to the consolidation of Laser Soft Infosystems Ltd.
But things to watch out will be sharper focus on fixed-price contracts, pricing pressure, client additions, client mining, hiring pattern (freshers and laterals), IMS and BPO revenues, cost curtailment steps, apart from the usual profit and loss items.
We expect IT service companies to be more optimistic regarding the macro environment compared with the stance in the previous few quarters. While 2010 IT budgets are likely to be flat with a positive bias, the managements might not provide significant clarity on them.
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First Published: Sun, Jan 10 2010. 09 18 PM IST
More Topics: IT | TCS | Wipro | Infosys | Technology |