The bounce back in IT stocks, after Tata Consultancy Services Ltd’s (TCS) positive post-results statements, turned out to be extremely short-lived. Just one day later, these stocks were on a downward spiral all over again after Wipro Ltd and Satyam Computer Services Ltd on Friday reported their numbers.
The June quarter results of the third and fourth largest software services firms were pretty much in line with Street expectations. But both firms disappointed with statements on revenue outlook for the September quarter and by applying the brakes on hiring.
Satyam came up with an additional shocker that its June quarter revenue, under US accounting standards, was bolstered by an amount of $13.5 million (Rs57.8 crore today) arising from the sharp forex fluctuation during the quarter.Adjusted for this, not only was revenue growth last quarter dismal at 1.7% quarter-on-quarter, but it also turns out that the company missed its guidance target by $8-11 million. Coming as it did in an already shaky environment, the target miss led to a 7.5% drop in Satyam’s shares.
(IN DOLDRUMS) The company expects September quarter revenues to grow between 3.5% and 4.5%, which is lower than the 5-6% growth that Infosys Technologies Ltd has guided for. Similarly, Satyam’s annual guidance assumes an average growth rate of 5% in the third and fourth quarters. This again is lower than the 6% growth Infosys has assumed in its annual guidance.
This is significant because Satyam had grown at a much higher rate than all of its peers in the last fiscal year. And this had led to a significant re-rating of the stock. Prior to the sharp correction in its shares on Friday, Satyam had outperformed its peers, as measured by the National Stock Exchange’s CNX IT index, by 26% since April 2007. Since Satyam’s outperformance as far as profit growth goes seems to be a thing of the past, the stock, too, should follow suit.
There were other signs of stress in Satyam’s results. It added only about 500 employees on a consolidated basis (that is, including subsidiaries). That’s an addition of a mere 1% to its workforce. A year ago, it had added 2,800 staff on a smaller base.
Wipro grew revenue by a decent 3.5%, buoyed by an increase in average pricing. Realization improved owing to an increase in fixed price revenues and because of certain non-linear initiatives taken by the company. Non-linear initiatives refer to offerings that don’t depend on employee additions for growth, unlike traditional software services offerings. As these businesses scale up, margins can get disproportionately higher, simply because costs don’t increase to the same extent.
But Wipro crushed all hopes that such a trend would continue by saying that it expects revenue growth in the September quarter to be just 2%, and none of that would be because of an increase in realizations. Worse still, the headcount in its global IT services business fell by 725 employees. In the year ago June quarter, the company had added 2,734 employees.
The company seems to have postponed some of its campus hiring to the September quarter, which isn’t a good sign. It implies that the reported margin for the June quarter is artificially inflated, and there could be a sharp dip in margins when hiring catches up in the September quarter. The company even grants wage raises during the September quarter, which makes the outlook on profit margin for the second quarter grim.
Wipro has booked a loss of Rs67 crore on its forex hedge positions in its June quarter income statement, but has losses worth another Rs934 crore sitting on its balance sheet. If the rupee remains at current levels, or depreciates further, this could depress profit growth in the coming quarters.
Both Wipro and Satyam have reiterated views expressed by Infosys and TCS that although the environment is uncertain, the outlook on pricing and demand growth remains stable at this point. But all four have faced some client-specific issue, or the other. A couple of them have even slowed hiring. All this adds up to a rather scary outlook for the sector. It’s not surprising that the CNX IT index has lost 13% since the beginning of the current results season.
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