IT in Q4: Infy guidance in spotlight

Dollar revenues could fall sequentially but, given the weaker rupee, firms should be able to post decent margins.

More than anything else, the Street will be keen to hear out what Infosys has to say on its prospects for 2009-10: given that pricing pressures are unlikely to abate in a hurry, analysts are pencilling in a fall in dollar revenues for the Bangalore-based firm in the range of 3-5 per cent for the year, estimating they would come in at somewhere around $4.3- $4.5 billion.

As for the bottom line, an earnings per share of about Rs 102.50-103, indicating flat numbers over 2008-09, would be acceptable, anything worse might not go down too well.

That apart, falling revenues, even in constant currency terms, a first for India’s IT firms, could be the highlight of the March 2009 quarter results. The bigger firms could see dollar revenues come of by about 2-3 per cent sequentially over the December 2008 quarter, partly because of the adverse movement of the dollar against the pound. Of course, depending on how much of the currency exposure has been hedged, there could be mark-to-market losses.

However, the depreciation in the rupee should help mitigate the pressure on operating margins resulting from both price cuts and possibly weak volumes.

So, unless volumes have fallen sharply, most firms should be able to post reasonably good operating margins because they have been able to shift work offshore, which is a more profitable proposition, and also save on expenses by cutting the variable component of salaries and spending less on travel and other overheads.

Since the start of the year, IT stocks have done very well and the sharp rally in the past month, during which the BSE IT Index has gained 23 per cent, has left them that much more expensive.

At Rs 1426, Infosys now trades at just under 14 times estimated 2009-10 earnings while TCS is valued at around 11 times. That means there’s no room whatsoever for any disappointments in a demand environment that remains challenging and is unlikely to improve at least for another six months.