The rupee touched a 25-month high of 44.13 against the dollar last week. Its strength was also reflected on the BSE IT index, which shed 0.78 per cent. While a stronger rupee is not good news for IT companies, its impact is unlikely to be visible in the September quarter results, say analysts. That ‘s because, the rupee has actually weakened versus all three major currencies USD, GBP and the euro on a quarterly average basis. “The average q-o-q depreciation of the rupee will have a positive impact on the September margins of IT companies, “ said Rajiv Mehta, AVP, India Infoline, adding that Ebitda margins would expand 70-80 basis points (bps). Among the beneficiaries, while HCL Tech and Tech Mahindra ‘s top line and margins will be aided by a higher exposure to GBP/EUR, the former could post forex losses to the tune of $15 million, believe analysts. That apart, the medium-term outlook is also improving with better demand and pricing, though some cost pressures remain.
Demand, pricing improving
For the September quarter, Tier-1 IT companies are expected to witness a healthy 7-8 per cent dollar revenue growth (8-10 per cent in rupee terms) over the previous quarter. Rise in discretionary spend, full services deals being awarded and furtherance to infrastructure outsourcing initiatives will drive revenues upwards. BFSI, Retail and telecom will drive demand. Latest Accenture results indicate a surge in demand for outsourcing. Pricing commentary from companies is also expected to be positive, hinting at price hikes in FY12. Challenges on the supply front are also going down with attrition expected to normalise by the end of the year.
| HI-TECH SHOW | ||||
| CMP (Rs) | PAT * | % chg | FY11 P/E * | |
| TCS | 949 | 1,979 | 10.0 | 23.1 |
| Infosys | 3,075 | 1,701 | 9.1 | 25.1 |
| Wipro | 462 | 1,348 | 11.4 | 20.8 |
| HCL Tech | 430 | 333 | 3.2 | 17.0 |
| Tech Mahindra | 773 | 153 | -13.6 | 14.3 |
| * As estimated for Q2 by analysts; % change is over June 10 quarter Source: Bloomberg, BSE | ||||
Margins a mixed bag
While Infosys is set to witness an expansion of 150-200 bps in its operating margins, employee promotions may be the pressure points for TCS and Wipro. Gains from currency and high volume growth will ease this pressure to some extent. Margins for HCL Tech are also expected to be weighed down by salary hikes. Margins are likely to remain under pressure at Tech Mahindra (due to wage hikes) and Patni (due to recent acquisitions).
Trickle-down effect
In the September quarter, Tier-2 companies are set to report strong sequential growth that comes after a lag of a few quarters for the tech heavyweights. This is expected to be driven largely by the existing large client ramp-up. Players like Hexaware could report a 9.5 per cent sequential dollar-revenue growth and over 300 bps of margin improvement. Infotech Enterprises and eClerx are also expected to perform well.
Road ahead
IT bellwether Infosys may raise its full-year dollar revenue guidance 22-25 per cent (from 19-21 per cent given earlier) and EPS guidance to Rs 116-119 when it announces its results on Friday. Analysts also foresee a 3.5-5.5 per cent rise in the December revenue guidance by Wipro. In the near-time while cautious optimism prevails further clarity will emerge as companies provide their FY12 guidance Meanwhile, Infosys and TCS remain the favourites of most analysts among major companies.