Salary hike, cross-currency volatility and the euro crisis are expected to affect the margins of Indian information technology (IT) companies as they knuckle down to announce their first quarter (April-June) numbers. Analysts, however, see an increase in volumes.
The first quarter earnings season starts on July 13, when Infosys reports its numbers.
Cross-currency movement is forecast to have a 100-150 basis points (bps) impact on margins in dollar terms, but companies are expected to register a volume growth of five-six per cent, according to analysts. In the first quarter, the rupee stayed stable against the US dollar, while the euro and the GBP depreciated against the US dollar by 9.42 and 4.3 per cent, respectively. The euro depreciated by 6.19 per cent against the rupee.
“Expect 4.8-6.4 per cent quarter-on-quarter (QoQ) constant-currency dollar revenue growth for top three large caps, with cross-currency negative impact likely to be 1-1.3 per cent. Whereas, Ebitda (earnings before interest, tax, depreciation and amortisation) margins are likely to decline 50-160 bps QoQ for top three large caps due to wage inflation and cross-currency impact,” noted an ICICI Securities report.
It said the cross-currency impact on firms like HCL Technologies, Tech Mahindra and Infotech Enterprises would be more than that on large cap firms.
Infosys might emerge as the top performer this quarter, said analysts. According to an Edelweiss report, Infosys will surpass its revenue guidance of 2.6-3.4 per cent growth, Q-o-Q, with ease. “The full year 2010-11 guidance of 16-18 per cent in dollar terms is unlikely to be raised,” stated the report. “Infosys is certainly among the favoured picks. The recent run-up in the stock is due to the expectation that the company would raise its guidance. But being a conservative firm, we will have to wait and watch,” concurred an analyst at a leading analyst company.
Analysts are also positive about the growth of the sector following the recent results of Accenture and Oracle.
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“These trends are clearly evinced from the recent Accenture results that saw solid demand for technology outsourcing and consulting services. Further, new license revenue — a key measure of software growth — posted strong growth for Oracle,” said Kunal Sangoi, Ganesh Duvvuri and Pratik Gandhi of Edelweiss Securities in their report.
Despite a volume growth for the top majors, analysts are keenly observing management remarks on Europe and the US markets. “Until now, companies have not seen any business volumes being affected due to this crisis (as exposure itself remains low). However, we note that Indian IT companies respond to global cues much later in the global tech value chain. Sharp depreciation of the euro and the GBP will nevertheless impact the reported financial numbers,” pointed out the Edelweiss report.
The recent developments in the European economy, coupled with the highly volatile euro, were set to spoil the offshore party, said a Forrester report. “This time, it will be services providers who will be less interested in Continental European business because of how it will impact their profitability. The European market for corporate IT products and services (measured in euros) plunged by 6.3 per cent in 2009. Furthermore, we expect that the European IT market recovery in 2010 will be slow — four per cent growth,” says Sudin Apte, Principal Analyst, Forrester.
The falling euro only adds to the woe of Indian IT companies, given that around 20-25 per cent of the business of Indian firms comes from the UK region. The past five months have seen a historic drop, and the conversion stood at 1.22 euro per US dollar on May 30, 2010.
“To Indian vendors, a 20 per cent drop in exchange rates means a substantial reduction in revenue realised, or less money they will receive in hand in India. If the euro trails at same level — or worse, drops even further — then Indian companies may lose more than 20 per cent on each European deal. In a market that has shown success only in pockets, this economic challenge may make vendors lose their interest in the geography,” said Apte.