IT firms likely to post better results for July-Sept quarter

With green shoots emerging in the global economy, and top Indian information technology (IT) companies like Tata Consultancy Services (TCS), Infosys Technologies, Wipro and HCL Technologies bagging large deals over the last three months, analysts expect the Q2 (July-September 2009) results to be better than the last few quarters.

For instance, two major vendor consolidation moves saw Indian IT firms maintain their turf. Australian telco major retained Infosys as its vendor, and energy major British Petroleum (BP), which cut its vendors from 40 to just 5, saw Indian IT players like TCS, Infosys and Wipro all being retained, apart from IBM and Accenture, in a five-year deal worth $2 billion.

However, the first signs of a good quarter, according to analysts, will come from the guidance of India’s second-largest IT services provider, Infosys Technologies which will announce its results on October 9. They are expecting Infosys not only to up its revenue guidance for the 3QFY10 (October-December 2009) but also beat its earnings per share (EPS) guidance of Rs 23.67 - 24.09 to Rs 26.5.
 

Q2 ESTIMATES
Company	Sales (q-o-q)		Net profit (q-o-q)
	Q2FY10E	% change	Q2FY10E	% change
TCS	7,447	3.3	1,595.50	4.9
Infosys	5,563	1.7	1,479	-3.1
Wipro	7,103	10.7	1,150	13.3
HCL Tech	3,038	4.4	388.6	17.7
(Figures for sales and net profit in Rs crore)     Source: Angel Research

All the major Indian IT firms, predict analysts, will register a growth of 2-3.5 per cent growth in dollar revenue terms on a sequential (compared to the trailing quarter) basis. Volume growth, they note, will hover around 1-2 per cent.

Yet, a positive is the cross-currency headwind. Analysts are expecting a positive impact of 1-1.5 per cent due to currency movements. Over the quarter, the rupee saw a marginal appreciation against the US Dollar, of 0.6 per cent qoq, based on the quarterly average rate. This appreciation, albeit marginal, is the second consecutive quarter of appreciation of the rupee against the greenback, after five consecutive quarters of depreciation, said an Angel Broking report. Indian IT firms earn in dollars but spend in Indian rupees.

On the other hand, the rupee depreciated against other major currencies over the quarter, namely the Euro and British Pound. Against the Euro, the rupee lost over 4 per cent of its value, based on the quarterly average, while a depreciation of nearly 5 per cent was witnessed against the British Pound. “Thus, on an overall basis, the currency movements have been slightly favourable for Indian software companies,” stated the report. Pricing, though, remains a concern, and the street would look at hiring trends (Wipro, though, will not be hiring this quarter and hence its numbers may look better) for the uptick for the next few quarters.

Increasing selling, administrative and marketing (SG&M) expenses are another issue to be looked at. “Infosys’ margins might decline as the company had said that they will continue to invest in expanding its sales and marketing team and would look at hiring in this region. This quarter, we are expecting the sales and marketing expenses to go up by 5.5 - 5.6 per cent from last quarter’s 4.5 per cent,” said an analyst who did not wish to be quoted.

Kanwaljeet Saluja of Kotak Institutional Equities concurred in a report: “We expect Infosys’ operating margins to decline 100 basis points (bps) sequentially, largely on the back of investment in sales and marketing (S&M).”