Operating profit for big software firms expected to rise 10%

Operating profit for big software firms expected to rise 10%

Bangalore/Mumbai: Big 3 software companies will declare their results for the second quarter (July-September) of this fiscal in the next 10 days and analysts expect their earnings to be better in sequential terms than they were in the quarter ended June.

Operating profit for Tata Consultancy Services Ltd (TCS) and Infosys Technologies Ltd declined by 9-10% in the quarter ended June in sequential terms; this is expected to go up by around 10% in the quarter ended September.

That’s because the rupee appreciated by 1.8% against the dollar in the three months to 30 September compared with around 7% in the three months to 30 June.

It’s also because the larger software companies have been able to do more business and at better prices, say analysts.

“We expect 7.9% quarter-on-quarter growth in billed effort for the top four players (TCS, Infosys, Wipro Ltd and Satyam Computer Services Ltd), said ABN Amro equity analysts Pankaj Kapoor and Srinivas Seshadri in a 4 October report. The duo added that the Indian software sector would see revenues rise by an average of 7.6% in dollar terms and 5.8% in rupee terms in the July-September period over the previous quarter, as more customers outsourced the development of software applications.

According to Ashwin Mehta, an equity analyst with Ambit Capital, sequential revenue growth for Infosys, TCS and Satyam would be 10%, 8.6% and 6.9%, respectively. He added that the sequential growth in profit after tax would be 8.9%, 6.9% and 2.5% for the three companies.

The results—Infosys declares its on 11 October, TCS on 15 October and Wipro on 19 October—hang over the coming earnings season for two reasons.

Software firms are among the first to declare quarterly results and set the trend for what follows.

And 13.5% of the earnings of 30 stocks that comprise the Sensex, the benchmark 30- stock index of the Bombay Stock Exchange, come from software companies, with 50% of this number vulnerable to the movement of the rupee, according to domestic broking house Motilal Oswal Securities Ltd.

In the run-up to the results, on Monday, the Bombay Stock Exchange’s Information Technology Index was the only one to close up, rising 0.63% on a day when the Bombay Stock Exchange’s benchmark Sensex shed 282, or 1.59%.

Some analysts said fear of the rupee’s appreciation and a slowdown in the US, the largest market for the services offered by Indian software companies, have led to premia on IT stocks to fall sharply, leaving room for growth. “There has been a big run-up in all sectors but not in IT," said Lalit Thakkar, head of research at Angel Broking.

Some analysts said that while the results of software companies would be better than expected in the July-September period, the rupee would continue to appreciate against the dollar in the longer term.

Most analysts will also be looking to the outlook of the software companies.

ABN Amro’s Kapoor and Seshadri said in their report that this “would indicate companies’ confidence in margin management in the face of currency appreciation".

The dollar breached the psychological barrier of Rs40 last month and vendors said the effect of this would be felt in the coming quarters.

“It does impact our margins. It will be felt in the subsequent quarters," said R. Rajesh Ramaiah, corporate treasurer for Wipro, in a telephonic interview on 20 September, a day after the dollar dropped below Rs40.