Earnings preview: Technology sector

Earnings preview: Technology sector

Q2 FY09 is unlikely to spring up any major surprises either positive or negative. Therefore, the upcoming IT result season would likely be a non-event with respect to stock performance.

This time, street expectations are extremely low and should be met comfortably. A likely dollar revenue guidance miss in the quarter and a 2-3% downgrade in FY09 dollar revenue growth guidance seems to be already factored in.

Further, we have entered into the result season post a sharp round of cut in FY10 earnings estimate and steep stock price correction (>25% since the start of September 2008) across the sector.

On the other hand, the fast deteriorating macro environment would limit any positive surprises in the short term.

We think Q2 FY09 would not bear the brunt of the recent bankruptcies / nationalization / acquisition of the various large BFSI companies in the US.

As these unfortunate events unfolded only towards the end of quarter, we suspect any critical business impact only from Q3 FY09.

In Q2 FY09, we expect modest US dollar growth (2-5% q-o-q) but strong rupee growth (5.5-9.5% q-o-q) in revenues due to the sharp rupee depreciation.

Operating margin is likely to improve materially for most companies except for those who have implemented salary hikes (Satyam, HCL Technologies and Wipro).

We expect Infosys Technologies and TCS to lead Q2 FY09 performance with double-digit operating profit and earnings growth.