Rising rupee will stem growth of TCS, Infosys

Infosys probably will say fiscal first-quarter net income rose 23%, the slowest since the three months ended March 2006, to Rs980 crore, based on the median estimate of nine analysts Bloomberg surveyed. TCS may report a 25% gain to Rs1,080 crore, the survey showed.

The rupee may advance another 0.5% against the dollar this year, after a 6.8% gain in the quarter eroded the value of earnings from the US, the companies’ biggest market. Profit at TCS and Infosys was also damped by higher wages.

Indian technology stocks dropped 5.2% this year.

“Some amount of rupee appreciation was expected, but the extent of the appreciation was a surprise," said Jayesh Gandhi, who helps manage about $5.9 billion (Rs23,836 crore), including shares of Infosys and TCS, at Birla Sun Life Asset Management Co. Ltd in Mumbai. “That will impact the profit margins for some of the software companies."

Shares of Bangalore-based Infosys, which reports results on Wednesday, declined 11% this year, after gaining 50% in 2006. Mumbai-based TCS, scheduled to report earnings next week, fell 3.5% after climbing 43% last year.

The Bombay Stock Exchange’s 30-share benchmark index, the Sensex, gained 9.1% this year.

The rupee may advance 0.5% to 40.20 against the dollar by the end of this year, according to the median forecast of 21 strategists surveyed by Bloomberg.

Infosys’ sales in the three months ended 30 June probably increased 32% to Rs3,840 crore, the survey showed, missing the company’s April forecast of at least Rs3,896 crore. TCS’ revenue may have gained 26% to Rs5,210 crore, according to the analysts.

Bangalore-based Wipro Ltd, India’s third biggest software company, is likely to report a 21% increase in net income to Rs744 crore, according to the survey. Sales at the company, which also makes light bulbs and soaps, may have increased 32% to Rs4,120 crore.

Fourth-ranked Satyam Computer Services Ltd, based in Hyderabad, may post the smallest profit gain of 12% to Rs396 crore, according to the median estimate of 11 analysts. Sales likely climbed 26% to Rs1,810 crore.

The companies provide call centre operations, custom software and computer network management for clients such as ABN Amro Holding NV and General Electric Co.

In April, Infosys increased wages by between 14% and 15% for employees in India. TCS also said it plans to boost salaries by 12% to 15% to stem employee defections.

India may have the highest salary gains among Asian countries this year, averaging 14.5%, as companies such as IBM Corp. and Barclays Plc. increase hiring, human resources consultant Hewitt Associates Inc. had said in March.

Every one percentage point appreciation in the rupee may have trimmed profit margins by as much as 0.5 point, Infosys chief financial officer V. Balakrishnan and Wipro corporate treasurer Rajesh Ramaiah had said in separate interviews in June.

“Currency is one of the several challenges we face," Balakrishnan said by email on 8 June. “We have to manage both currency and wages as one more of several other risks we face in the business."

The rupee’s gains are likely to have reduced Wipro’s earnings the most, Bhuvnesh Singh and Sunil Tirumalai, analysts at Credit Suisse, had written in a report dated 4 June.

Wipro hedges 16% of its foreign currency revenue, less than half the 38% for TCS, according to the analysts, who cut the stock’s rating to “neutral" from “outperform".

Salary increases at Wipro, estimated by analysts at about 15% this year, will also reduce profitability by as much as 400 basis points, Wipro’s Ramaiahhad said on 6 June.

Analyst estimates for TCS and Wipro are based on US accounting rules, while those for Infosys and Satyam conform to Indian standards. Bloomberg

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