BackRobust US sales likely to boost revenues at IT firms
Robust US sales likely to boost revenues at IT firms
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Bangalore/Mumbai: Increasing US sales are likely to boost revenues of software exporters as they begin reporting financial results for the June quarter, but higher wages and lower returns from Europe will put profits under pressure.
Indian information technology (IT) firms are now getting more orders from the US compared with a year ago, when the US economy was reeling under a slowdown. But they have had to raise wages to retain employees as the IT sector has picked up momentum. The European debt crisis, which has caused the euro to slide against the dollar, has also hurt earnings.
Also See Earning Expectations (Graphic)
The revenue of Infosys Technologies Ltd, India’s second largest IT firm viewed as an industry bellwether, will grow 5.7% in the June quarter from the preceding three months to Rs6,253 crore, according to a Mint poll of 10 brokerages. Net profit is likely to be flat at Rs1,570 crore.
In April, Infosys had forecast its revenue in the three months to 30 June at Rs5,919-Rs5,963 crore.
The poll covered Citigroup, UBS AG, Sharekhan Ltd, Edelweiss Securities Ltd, India Infoline Ltd, Kotak Securities Ltd, Ambit Capital Pvt. Ltd, Jaypee Capital Services Ltd, Motilal Oswal Securities Ltd and Angel Broking Ltd.
The country’s largest software exporter Tata Consultancy Services Ltd (TCS), is expected to see a quarter-on-quarter (q-o-q) revenue growth of 7.1% to Rs8,284 crore, but a decline of 4.1% in profit to Rs1,852 crore.
Wipro Ltd, India’s third largest software exporter, is likely to report a 0.92% decline in profit to Rs1,210 crore. Revenue, including its consumer products business, will grow 2.93% to Rs7,182 crore, according to the poll.
Infosys will report its first quarter results on 13 July, TCS on 15 July, and Wipro and Tech Mahindra Ltd on 26 July. HCL Technologies Ltd, which follows the July-June fiscal year, will report its fourth quarter and full-year results on 29 July.
On 1 July, technology researcher Gartner Inc. lowered its expectations of worldwide IT spending growth in the June quarter, saying it would grow 3.9% to $3.35 trillion (Rs157.12 trillion). In April, it had forecast a 5.3% growth.
“The European sovereign debt crisis is having an impact on the outlook for IT spending," said Richard Gordon, research vice-president at Gartner. “The US dollar has strengthened against the euro during the second quarter of 2010, and this trend will likely continue in the second half of 2010, which will put downward pressure on US dollar-denominated IT spending growth."
Euro has dropped 12% against the dollar in the six months to June.
Another tech researcher, Forrester Research Inc., said the drop in euro will cause at least a 12-15% loss in income for Indian vendors’ European business.
“If the euro trails at same level—or worse, drops even further—then Indian companies may lose more than 20% on each European deal. In a market that has shown success only in pockets, this economic challenge may make vendors lose their interest in the geography," analyst Sudin Apte said in a 1 July note.
UBS Securities India Pvt. Ltd analyst Diviya Nagarajan expects most large software firms to report rupee revenue to grow 2-6.7% in the June quarter over the preceding quarter, due to a higher volume growth of 4-6.5%.
“We expect operating margins for the sector to decline 50-120bps (basis points) q-o-q due to higher wage costs and increased sales and marketing expenditure," she wrote in a 5 July report.
One basis point one-hundredth of a percentage point.
“Given that our EPS (earnings per share) estimates for Infosys are 14% higher than Infosys’ guidance, we expect limited upside to our estimates." she added.
UBS expects Infosys to raise rupee guidance by 6-8%, while not touching the dollar guidance of 16-18%. In April, Infosys had forecast fiscal 2011 revenue in rupee to grow 9-11% to Rs24,796-Rs25,239 crore.
Analysts Surendra Goyal and Vishal Agarwal of Citigroup Global Markets India Pvt. Ltd are also expecting spending patterns of clients such as oil firm BP Plc, which has been hit due to an oil spill off the US coast, to have an impact.
The key things to look for are “growth outlook and revision in guidance—weaker than anticipated INR (rupee) to boost EPS guidance; attrition trends; pricing—any likelihood of a faster than expected uptick given the supply-side pressures in the market; and update on client-specific situations like British Petroleum," they wrote in a note on 1 July.
Tech Mahindra relies more on European clients, led by British Telecommunications Plc. “Tech Mahindra looks vulnerable post a sharp run-up, given challenges on BT/cross currency headwinds/lack of clarity on Satyam," the Citi analysts wrote.
The firm acquired fraud-hit Satyam Computer Services Ltd last year and renamed it Mahindra Satyam.
Graphic by Paras Jain/Mint
raghu.k@livemint.com
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