Dollar revenue of large firms may rise 3-5%

Dollar revenue of large firms may rise 3-5%

Bangalore / Mumbai: India’s top software firms will next week begin reporting quarterly results that may show improving business from Western markets, but analysts will be more keenly watching their commentary on client budgets for 2010 to gauge the sector’s growth trajectory.

Customers in the US, the largest technology spenders, are expected to finalize their annual budgets in January, which would indicate how much they plan to spend on buying computers or software and on building applications. Indian software firms earn two-thirds of their revenue from the US.

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Globally, spending on information technology (IT) is expected to be $3.3 trillion (around Rs150 trillion) in 2010, a 3.3% increase over the previous year, technology researcher Gartner Inc. had said in a note on 20 October.

Of this, spending on IT services, in which Indian firms are dominant, is expected to grow 4.5% to $816.14 billion.

“While the IT industry will return to growth in 2010, the market will not recover to 2008 revenue levels before 2012," said Peter Sondergaard, senior vice-president and global head of research at Gartner.

In other words, while the global economy may be looking up, it may be too early for clients to hike their IT budgets yet. “It is not going to be like somebody turning the switch back on," said Kumar Parakala, global head of sourcing and IT advisory services at audit and consulting firm KPMG.

Investors will be looking forward to the “direction of IT budgets—initial expectations are flattish IT budgets year-on-year; timing of the budgets—expectations of budgets closing on time; and revival in discretionary spends—most companies are hoping for some revival, but too early to take a call and pricing", analysts Surendra Goyal and Vishal Agarwal of Citigroup Global Markets India Pvt. Ltd wrote in a report on 5 January.

Discretionary spending is the optional money clients have to spend over their planned budget.

For October-December, analysts see a 3-5% growth in dollar revenue over the preceding quarter for most large IT firms.

During the downturn, as clients pared IT budgets, firms such as Tata Consultancy Services Ltd (TCS), Infosys Technologies Ltd and Wipro Ltd cut costs, became more efficient and began moving more to the so-called fixed price projects that de-linked revenue to the number of people deployed.

These firms are strengthening their sales staff in anticipation of a rebound in the economy and hiring people to beef up their delivery teams.

Infosys, India’s second largest software exporter, will hire 13,000 people in fiscal 2011. The Bangalore-based firm will report its third quarter (Q3) results on 12 January, TCS on 15 January and Wipro on 20 January.

Brokerage Anand Rathi Financial Services Ltd expects the top six IT companies to report “sequentially flattish rupee revenue and a 2.5-5% growth in dollar revenue, with net profit sliding 2.3%".

“While 2010 IT budgets are likely to be flat with a positive bias, managements might not provide significant clarity on them," Anand Rathi said in a 5 January report. “We expect Wipro to post the best results within the top-tier universe...with US dollar revenue growth of 5%."

Wipro had forecast a revenue of $1.09-1.1 billion from its global IT revenue in Q3, marginally higher than the $1.06 billion in the preceding three months. Infosys’ revenue outlook of Rs5,429-5,476 crore for Q3, on the other hand, is 2-2.8% lower than in the July-September period.

TCS, Infosys and Wipro, India’s top three IT firms, had grown at around 30% every quarter in 2007-08, before the slowdown started hurting.

The December quarter is traditionally weak because of fewer billing days during the holiday season in the West.

According to a Mint poll of eight brokerages, Infosys’ revenue for the latest quarter is seen flat over the preceding three months at Rs5,585 crore. Its net profit is expected 4.7% lower at Rs1,471 crore.

TCS, too, is expected to show a 4.2% fall in profit at Rs1,596 crore over the previous quarter, with revenue flat at Rs7,437 crore.

Wipro is likely to report a 2% dip in profit and revenue to Rs1,137 crore and Rs6,802 crore, respectively.

Graphics by Ahmed Raza Khan / Mint