Infy results to provide cue to demand in US, UK

The results of Indian information technology firms, predict analysts, will reflect the continued pressure on their revenue and earnings growth for the first quarter ended June 30, 2009.

Infosys Technologies — which declares its much-awaited results on July 10 — should provide a cue to the client demand environment in the US and UK (which account for over 80 per cent of its revenue).

Manoj Singla, Bhavin Shah and Nishit Jasani of J P Morgan (Asia Pacific equity research), in their report, say Infosys’ dollar revenue will decline around 3 per cent. The company had predicted a 3.7-5.4 per cent decline, with a 270 bps decline in EBIT (operating) margins due to higher selling, general and administrative (SG&A) and visa costs.
 

INFOSYS’ GUIDANCE EXPECTATIONS
	Guided	Expected
1QFY10 $ revenue growth	-5.4% to 3.7%	-4%
FY10 $ revenue growth	-6.7% to -3.1%	-5% to -1%
FY10 EPS	Rs 96.65-101.18	Rs 93-96
Source: Company/MOSL

“We will watch for management commentary on how clients were ramping up for the September/December quarters. We believe that outsourcing budgets for clients have increased and clients are incrementally confident of spending their allocated budgets. This was suggested by the Accenture results, showing a significant increase in outsourcing bookings,” stated the J P Morgan study.

While analysts are expecting firms to indicate an improved business environment on the back of some of the comments made by senior management personnel of IT bellwethers — Infosys and TCS -- international research reports have been suggesting a different scenario.

A recent Forrester report, for instance, states that 2009 growth forecasts are lower than before, with the US IT market now expected to shrink by 5 per cent in 2009 and the global IT market to drop by 11 per cent in US dollars.

Forrester analyst Andrew Bartels says: “For 2009 as a whole, the drop in US tech purchases will be minus 5.1 per cent, a bigger decline than the minus 3.1 per cent rate we had predicted in our March 2009 report. The bigger factor for this is the big drops in business investment generally — and IT investment in particular — in Q1 2009, which is also likely for Q2 2009.”

The other point that will be keenly awaited is the scenario on pricing. Price realisations are likely to face downward pressure over the next couple of quarters, primarily due to the full impact of like-on-like pricing discounts offered recently, stated an IDFC-SSKI India report. Similarly, J P Morgan is expecting the pricing pressure to continue in the first quarter. In case of Infosys, the pricing decline is expected to be around 1.3 per cent on a sequential (compared to the trailing quarter) basis.

The increasing shift on offshoring will also impact the top-tier firms’ revenues. Analysts are saying that while offshoring will give the desired savings for clients, this leads to lower revenue for the same billed efforts. “Typically a 1 per cent offshore shift reduces revenue by around 1.2 per cent; however, operating margin improves by up to 30bps, keeping absolute operating profit more or less same,” says Hitesh Shah of IDFC-SSKI Securities.

On volumes, Motilal Oswal’s Ashwin Mehta and Vihang Naik expect 3 per cent decline for Infosys and 1 per cent decline for Wipro, whereas Tata Consultancy Services (TCS) and HCL Technologies will remain flattish. “We expect pricing for Infosys to decline by 1.3 per cent quarter-on-quarter, after 2 per cent constant currency decline in fourth quarter of FY09. Our revenue growth estimates factor in 2.8 per cent QoQ volume decline,” said the Motilal Oswal report. It further stated that during the first quarter of FY10, the pound and the euro appreciated 9 and 4 per cent, respectively, against the dollar.

In terms of forex impact; HCL Technologies will be a gainer, as it has cancelled covers worth $230 million and its hedges have been reduced from $1,288 million in March 2009 to $810 million in May 2009.

Forex losses will not be a pain-point for the first quarter results. According to a Motilal Oswal report, the currency fluctuation and rupee appreciation will counter each other, leading to a minimal impact on rupee revenues and EBITDA margins. “Infosys had hedges of $506 million as of March 2009; we expect MTM forex losses to be Rs 20.5 crore in this quarter. HCL Tech forward covers of around $1.3billion; we expect the company to book forex gains of Rs 73 crore due to positive impact of its net monetary liabilities and large forex covers,” said the report.