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| IT Services: Outlook uncertain |
| Shobhana Subramanian & Varun Sharma / Mumbai Jan 09, 2009, 00:41 IST |
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Valuations may be cheap but there’s too much uncertainty surrounding the business.
With Infosys trading at 11 times estimated 2009-10 earnings, close to its historic lows, valuations of tech firms seem rather attractive. Infosys has actually outperformed the Sensex over the past year. But the December 2008 quarter results of IT companies will most likely be disappointing with analysts expecting Infosys to miss the lower end of its US$ revenue guidance and TCS’ bottom line likely to be hurt by forex losses.
 The company may even lower its dollar revenue guidance for 2008-09. What has worked to the advantage of the tech sector in 2008-09 is the 20 per cent plus depreciation in the rupee —that will help push up the rupee revenues and cushion the pressure on operating margins to some extent. However, the appreciation of the US$ against the pound will hurt the reported dollar numbers. So, for the sector as whole dollar revenues may stay flat.
Also, the accompanying commentary from the management could be pessimistic for the near term. Should that happen, it would reflect that demand is weakening beyond what was anticipated and would not be surprising given that there has been some news of orders being pushed back and also the odd cancellation. The warnings from global technology firms over the last couple of months indicate that the global economy isn’t showing any signs of recovery; on the contrary there is talk of a prolonged recession.
With the result that customers aren’t likely to firm up their IT budgets for 2009 in a hurry. Under the circumstances, the growth in volumes for 2008-2009 could be far more subdued than the estimated 12-15 per cent. Moreover, with smaller firms expected to take cuts in pricing with a view to protecting volumes, pricing for bigger vendors could fall marginally. That could well pressure margins and consequently earnings for another year or so. So, while the sector’s fortunes will no doubt improve over the long term, with the turnaround in the global economy, the uncertainty in the near future could keep tech stocks cheap for some more time.
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