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IT services: Q1 outlook gloomy for Tier-I companies

While the rupee fall may shore up margins, the Street expects a weak Q1

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A weaker rupee is good for technology firms, as it improves margins and shores up earnings. But this time around, the business environment is expected to take precedence over the rupee’s 9.36 per cent fall in the first quarter. Equity strategists say the weakness in the rupee is reversible and cannot be a reason to buy into the sector. While some firms like Macquarie have a negative view on the sector, others are relatively cautious.

Clearly, the market isn’t expecting any fireworks from the big boys, as the earnings season kicks off next week. By and large, the first quarter is expected to be weak for large IT companies, as project ramp-ups are not happening and spending is deferred. The banking and financial services space is likely to be a drag all through FY13. Most brokerages are advising clients to wait till clarity emerges on corporate profitability in the US and client-spending improves. Analysts expect Tier-I companies to clock flat to low single-digit volume growth in the first quarter. While Infosys had given a zero to one per cent revenue growth for Q1, analysts expect revenue to fall a marginal 0.2 per cent, sequentially. On the other hand, is estimated to grow revenues by 2.4 per cent sequentially, says Religare. Wipro, too, is expected to see a flat to negative revenue growth, while Tech is expected to see revenue growth of 2.5 per cent.

Even though the rupee’s decline is not reason enough to drive stock performance, there’s no doubt it has its advantages. The 9.36 per cent fall in the rupee, after factoring in cross-currency movements, is good enough to nullify the higher wage and visa costs for tech companies. Given that other currencies, too, have taken a hit against the dollar, the cross-currency moves will take away some of the gains. According to Barclays, the cross-currency move of the US dollar vs European currencies will have a negative impact of 1.5 per cent on dollar revenue growth. According to Brics Securities, net effect of the rupee depreciation and cross-currency (negative 0.5 per cent), is likely to boost margins by 240-320 basis points. While rupee revenues are expected to get a boost, analysts expect Infosys to cut its dollar revenue growth guidance by at least one per cent to seven to nine per cent due to cross-currency movements.

However, all players will not benefit equally from the currency movements. Religare does not expect TCS and Wipro to benefit from the rupee’s weakness, as much as Infosys and HCL Tech. The brokerage is expecting a marginal drop for TCS and Wipro’s margins due to wage rises and higher visa costs. Also, forex losses are expected to rise sequentially, due to higher losses on hedges for these two companies.

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