Rupee appreciation hits IT majors' revenues

The rupee's appreciation has taken the wind out of software industry's sails during the June 2007 quarter, with the top four software services companies posting a revenue growth rate of 28.73 per cent - the slowest year-on-year growth in five quarters.

The rising salary bills have not helped either.

The revenue growth rate for Tata Consultancy Services and Infosys Technologies has declined by over 20 percentage points to about 25 per cent from over 45 per cent in the quarter ended June 2006.

Satyam Computer somewhat stemmed the rot with revenue growth of 26.84 per cent compared with 34.1 per cent in the first quarter of 2006-07. Wipro too managed a better looking sales growth of 33.75 per cent.

The slowdown in revenue growth reflected in the net profit growth, which fell to a modest 27 per cent from about 50 per cent in the last four quarters. 

GOING THROUGH A LEAN PATCH
	Net sales		Operating profit		Net profit		Operating margins (%)
	Rs cr	% chg	Rs cr	% chg	Rs cr	% chg	2007	2006
TCS	5,202.89	25.22	1,500.41	36.15	1,214.13	36.37	28.84	26.52
Wipro	4,203.30	33.75	816.10	13.66	715.60	16.57	19.27	23.37
Infosys Tech.	3,773.00	25.14	1,337.00	31.08	1,079.00	33.54	35.44	33.83
Satyam Computer	1,830.19	26.84	473.49	10.24	378.32	6.87	25.87	29.77
Total for top four	15,042.08	28.73	4,127.00	26.23	3,387.05	27.03	27.44	27.98
*Note: % change over quarter ended June 2006

TCS reported the best net profit growth in this group, 36.4 per cent, while Infosys managed 33.5 per cent on the back of a 98 per cent rise in other income and an income tax gain of Rs 51 crore. Wipro posted net profit growth of 16.6 per cent, while Satyam Computer stayed in single digit.

Analysts say the hit has been lessened since IT companies have been generating returns from other income and have good cash reserves.

Among the top three, Wipro Technologies, according to analysts, fared the worst. The company's operating margin was hit by almost 15 per cent.

The IT majors are resorting to price hikes to offset the rupee's impact. TCS and Infosys have managed to increase their billing rates by 4-5 per cent. Wipro's onsite and off-shore billing rates have grown by 1-2 per cent. In Satyam's case, the number of clients billing more than $5 million increased to 65 from 57.

Sanjeev Hota, senior research analyst with Emkay Research, said, "Effective hedging seemed to be the only way for IT companies against the rupee appreciation." "Nobody was expecting great results. But the concern was how these companies will take care of the currency risk," he said.

While hedging will remain in focus, the companies will have to take a good look at their margins. "I think it will be fair to say that the days of 30-40 per cent growth in rupee terms are over. If you look at all the numbers, the dollar growth of the four major IT companies is on track. It is only the rupee growth that has been affected," said an analyst who did not want to be named.

Another issue is the rising salary bill. In the case of Infosys, besides higher visa costs, offshore wages increased by 13-15 per cent and onsite wages rose by 5-6 per cent.