Earnings Preview: Information Technology

Earnings Preview: Information Technology
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First Published: Wed, Apr 08 2009. 09 50 AM IST

Updated: Wed, Apr 08 2009. 09 50 AM IST
The front-line information technology (IT) companies are expected to report a sequential decline in their revenues (in dollar terms) on an organic basis.
Infosys Technologies (Infosys) is expected to just about meet the lower end of its revenue guidance for the quarter due to the adverse impact of lower volumes (resulting from project cancellations, IT budget cuts and slow ramp-ups), pricing pressure and cross-currency head winds (with the dollar appreciating against the euro and Pound Sterling).
Even in rupee terms, the growth will remain muted since the rupee’s depreciation would add only 2% sequentially on an average.
However, Tata Consultancy Services (TCS) and HCL Technologies (HCLT) would show a sequential growth in revenues on the back of the full impact of their recent acquisitions during the quarter.
In terms of profitability, the operating profit margins (OPMs) are expected to decline by 40 basis points to 200 basis points for the front-line IT companies.
On the hedging front, Infosys is relatively better placed with a much lower exposure (and conservative marked-to-market accounting policy).
On the other hand, TCS is expected to report foreign exchange (forex) losses of around Rs200 crore as contracts aggregating to $190 million were scheduled to expire during the quarter.
Guidance holds the key
Given the global turmoil and uncertainty, the focus would be on the guidance for FY2010.
The street is building expectations of close to 5% decline in revenues (in dollar terms) in FY2010, largely based on the historical gap between the full year guidance of Cognizant Technology Solutions (Cognizant) and Infosys.
Cognizant has guided for at least a 10% revenue growth in CY2009 and traditionally Infosys announces a guidance that is around 10-12% lower than Cognizant’s guidance. In rupee terms, the street expects a guidance of a flattish growth in revenues.
At the net level, anything below the earnings guidance of Rs101-103 per share would disappoint the markets as the currency tail winds are expected to support the growth in earnings in rupee terms.
Apart from the guidance, the street would also focus on the management commentary on indicators such as project renewals and cancellation, and the extent of pricing cuts, margin levers such as wage rationalization and reduction in sales, general and administrative (SG&A) expenses.
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First Published: Wed, Apr 08 2009. 09 50 AM IST
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