IT Sector: Dismal show

SECTOR IN THE NEWS

Technology stocks have received a hammering after Infosys Technologies announced its first quarter results on July 11. The BSE IT index shed around fourteen per cent. While Satyam Computer and Infosys Technologies have corrected by over 15 per cent each, TCS and Wipro have recorded a single digit fall in their respective market prices.

The price correction is attributed to a dismal first quarter show. The June quarter put the brakes on hopes of rapid demand improvement. The volumes growth of the top four companies missed expectations, hiring was weaker than expected and there was no revision in the full-year guidance by either Infosys or Satyam.

The software giants could not take advantage of the rupee depreciation as the top IT giants had hedged their export receivables much in advance, anticipating appreciation of the rupee.

The top four reported combined mark-to-market losses of Rs 261 crore in the first quarter. Wipro and TCS, which undertake forex hedging on a cashflow basis, made provisions of Rs 1,344 crore in their account books for future hedging losses.

No wonder, frontline IT stocks such as TCS, Wipro, Infosys Technologies, Satyam Computer and HCL Tech are quoting at price-to-earnings multiples below 15 for estimated 2008-09 earnings.

The technology stocks are trading at all-time low P/Es following the low confidence in earnings. The first quarter results did not signal any demand recovery for the IT giants. The slowdown in new deals and hiring during the first quarter has an impact on the IT stocks.

TCS reported net forex losses of Rs 81 crore and calculated MTM losses of Rs 408 crore if the rupee weakens to around 45. However, if the domestic currency sustains at Rs 43, the MTM loss would be Rs 168 crore over next 8-10 quarters. TCS’ year-on-year revenue growth was the slowest among peers and it was the only company among the top four to show a decline in operating margins.

Infosys Technology guided growth acceleration in the second quarter and expects to do well in the full year. It posted a revenue growth of 28.7 per cent quarter on quarter, but the contribution of its top five clients declined 8.5 per cent. The operating margins rose by 174 basis points y-o-y, but declined by 207 basis points on a q-o-q basis.

Wipro posted sound revenue growth due to increased revenues from its top five clients. The company saw good profit growth due to non-implementation of a wage hike and reduction in hiring activities. Wipro has hedged export revenues of $3.1 billion at a rupee rate of 41 till FY09 and 44 for 2010.