IT companies may fall short of guidance

The leading Indian information technology services companies are likely to miss their sequential revenue growth forecasts for the third quarter of this financial year (October-December 2008), according to reports put out by prominent brokerage houses.

Even the year-on-year comparison does not throw up a very bright picture although the third quarter of the last financial year (October-December 2007) was bad for these companies.

Tata Consultancy Services, or TCS, which is the largest, is expected to report a fall in revenue as compared with the previous quarter. Even when compared with the third quarter of the last financial year, its revenue increase will be no more than a marginal 3.7 per cent.

Wipro’s sequential dollar revenue is expected to decline by 1.9 per cent while Infosys Technologies’ and Satyam Computer may report a decline of 3.4-4 per cent while there is a moderate softness in the pricing environment for other clients.

Overall, these companies are expected to report a decline in sequential dollar revenue by 2-4 per cent while the year on year growth in revenue is expected to be 4-9 per cent, the lowest in several years. In rupee terms, the sequential revenue is expected to grow in the range 6.1-11.7 per cent, says the IT analyst of Sharekhan Research. The growth in revenue is expected to be primarily driven by the 12 per cent depreciation in the rupee against the dollar.

The IT analyst of the Kotak Securities expects a decline in sequential revenue growth in dollar terms of the Tire-I IT firms, caused by weak volumes, pricing pressure from existing as well as new clients, and adverse impact of cross-currency movements.

Sharekhan expects the front-line IT companies to miss their revenue guidance as the utilisation rate was lower during the third quarter on account of a weakening demand environment and fewer working days in the quarter.

The IT analyst of MF Global, however, says the third quarter numbers are unlikely to show pricing pressure, but the management may indicate the negative pricing outlook. Its recent interactions with Indian IT companies and a few users of IT services in the US and UK indicate that the pricing scenario is likely to deteriorate in the coming quarter. The pricing will turn negative from the fourth quarter onwards the top clients want 10-15 per cent discount.

According to Kotak Securities, the revenue of Tire-I IT firms is expected to grow 29-38 per cent year on year, thanks to the 12 per cent rupee depreciation against the dollar. It says TCS may report 28.5 per cent growth in revenue in the third quarter, as compared to Infosys (expected revenue growth of 34.8 per cent), Wipro (36.8 per cent) and Satyam Computer (38.3 per cent).