Flat growth likely for IT firms in Q4: Analysts

The market was expecting the October-December 2007-08 quarter to be subdued for most mid- and small-cap IT firms. However, most results fell below analysts' expectations.

With the uncertainty over the IT budget among US firms, analysts expect a flat growth for the fourth quarter as well, with some companies postponing their hiring plans for the quarter ending March 31, 2008.

Mid-caps are a mixed bag of businesses, each having a niche focus, explains Ashwin Mehta, senior research analyst, Ambit Capital.

"While the margins of some mid-cap firms have been disappointing, the outlook is mixed with muted growth concerns. We have seen a few of them having postponed their hiring plans for the next quarter. Unless mid-cap firms are focused on their growth, they will find the going tough," he added.

"The volume growth has been subdued. We expected the growth to be in the 7-8 per cent region, but most of these firms registered a 3-4 per cent growth," said an analyst.

There have been surprises in terms of performances for companies such as Tanla Solutions, Prithvi Infotech and KPIT Cummins. 
 

LACKLUSTRE SHOWING
	Revenue			Net profit
	in Rs cr	y-o-y%	q-o-q%	in Rs cr	y-o-y%	q-o-q%
Tech Mahindra	970.4	26	8.1	199.4	19	9.7
i-Flex	619.6	11.15	7.6	106.7	-4	22
3i Infotech	323.4	82	13.9	49.6	77.6	15.3
iGate	209.3	-0.7	4.2	29	80	26.4
Sasken	141.32	7.8	-1.3	3.86	-67	-73
Aztecsoft	63.31	-11.2	2	2.19	-80	-68.39
NIIT Technologies	233.8	1	2	34.7	flat	1

While Tanla has done exceptionally well with 87.84 per cent growth in net profit, there is no reason why KPIT Cummins could not perform well or why Prithvi was unable to improve its margins, said another analyst.

The October-December quarter was slow for IT firms due to the holiday season (fewer working days) in the US. Besides, the rupee appreciated by almost 12-13 per cent in the year, coupled with a sub-prime crisis and the resultant slowdown. Hence, the performance of mid-cap IT firms was expected to be muted.

An analyst from IL&FS Investmart said, "The dollar to rupee movement is a concern, especially with the recession in the US, but we feel that the fundamentals of some of these firms are strong. While they might not be getting large deals because of budget tightening, they are getting smaller deals. We expect the next quarter to be strong."

For instance, results of firms such as Sasken, Aztecsoft, NIIT Technologies and Geometric Software were not only muted but also unimpressive.

Geometric in its first quarter for this financial year had said that due to changes in the management structure the results would be affected.

But the company, in its analysts' meet after the third quarter result, mentioned that it would require another quarter.

Analysts believe that for firms such as NIIT Technologies demand from customers will be a concern.

In the case of Tech Mahindra, which did perform well, analysts were not impressed.

"Somehow we do not see any growth in the core business. Europe still constitutes 70 per cent of the revenue and almost 61 per cent of the revenue comes from its top client," said another analyst.

On the other hand, firms with a domestic focus and a good mix of product and services managed to give a stellar performance.

Rolta and 3i Infotech have maintained their growth story due to their focus on the domestic market. 3i Infotech, on a sequential basis, has reported a 15 per cent rise in its net profit and 13 per cent rise in its revenue.