Tech firms presage higher IT spending

Analysts expect technology companies to clock 25 per cent-plus growth in revenues this fiscal

The prospects for the domestic technology sector are getting better. Taking cue from the rising optimism over the strengthening global economy, most of the companies in the sector are projecting a growth of 25 per cent and above in revenues during this financial year.

Moreover, the performance of tech firms has been encouraging during the fiscal ended in March this year.

Operating margins in three of the four quarters of the financial year 2003-04 were higher compared with those in the corresponding quarters of the preceding fiscal. Revenue growth, too, in all four quarters of the fiscal 2003-04 remained higher at 22-24 per cent compared with 15-20 per cent in all the quarters of the previous fiscal.

The stronger growth in the revenues is being driven by the increased penetration of offshoring, higher spending by existing clients and addition of new clients.

Analysts expect the medium-sized IT firms to post higher growth rates in revenue and profit in fiscal 2004-05 than the large companies.

Billing rates are largely stable and this should help counter the additional costs of hiring fresh staff to an extent. Thus, margins are only expected to decline gradually.

The stock markets are taking note of fresh developments in the sector. The BSE IT index has outperformed the Sensex, the market bellwether, and the S&P CNX Nifty, a broader index, since March 31, 2004.

The sector's market capitalisation has improved around five per cent between March 31, 2004, and June 7, 2004, while the market capitalisation of the Sensex and Nifty stocks have declined by 11.7 per cent during the same period.

The appreciation in the market value has been largely concentrated in mid-tier companies. For instance, the valuation of KPIT Cummins Infosystems has increased 46.4 per cent from Rs 208.40 on March 31 to close at Rs 305 on June 7, 2004.

e-serve international gained 35 per cent in value to Rs 817.50 over the same period, Nucleus Software is up 30.64 per cent to Rs 99.35, Mastek is up 30.60 per cent to Rs 261.20 and HCL Technologies is up 24.70 per cent to Rs 309.10.

The other mid-tier IT companies such as Tata Elxsi, i-Gate Global Solutions and Kale Consultancy too have appreciated between 10 and 18 per cent each.

On the contrary, sector major Wipro gained 9.26 per cent to Rs 1485.20, Satyam Computer gained 8.4 per cent to Rs 318.20 and Infosys Technologies gained 5.34 per cent to Rs 5201.80.

From the quarter ended September 2003, volume growth in the IT sector has percolated down from Infosys to other top-tier industry players. In fact, these companies have outgrown Infosys in the subsequent quarters ended December 2003 and March 2004.

Analysts view this as a sign of volume recovery and is expected to flow through to well-positioned mid-tier players marked by the visibility in the guidance of a few mid-tier companies. Along with revenue growth, operating margins of mid-tier companies are expected to recover from a low base leading to a higher profit growth.

Key sector level concerns exist mainly over the appreciation of the rupee, back-end offshore operations of the MNCs and increasing resistance to outsourcing. Analysts have factored in the impact of the rupee appreciation, but they do not expect the other two factors will impact revenue growth over the medium-term.

Analyst are positive about India's IT sector. The volume growth expectations have increased for the entire sector led by higher offshoring, buoyant US economy and stable tech spends. Pricing pressure continues to remain benign with some initial signs of a few companies asking for higher prices for contracts coming up for renewal.

These two trends are expected to balance the negative impact of the rupee appreciation and salary inflation and lead to a lower margin decline, improving the sector's outlook. For mid-tier companies, volume growth has become more widespread as the recovery progresses.