The July-September quarter, historically a strong one for most Indian IT firms, will be different this year, with many firms likely to issue a downward dollar guidance or post figures that could hover along the lower band of the guidance they have provided.
For instance, India's second largest IT services provider, Infosys, has always been the bellwether for IT companies. This quarter, however, in all likelihood, analysts expect it to downgrade its US dollar guidance for the year. Flat pricing and volume growth of 3 per cent, according to Enam analysts, are likely to help the company meet the lower end of the guidance. Issues to watch out for include headcount addition, revision in annual guidance and counter-strategy (in response to HCL Technologies' bid) on the Axon acquisition.
| SCREEN TEST Exposure to the troubled BFSI, retail sectors (in %) | ||
| Name | BFSI | Retail |
| Infosys | 35 | 12 |
| TCS | 43 | 9 |
| Wipro | 25 | 16 |
| Satyam | 21 | 10 |
| HCL Tech | 27 | 9 |
| Note: To attain a consolidated top line growth of 6-10 per cent in Q2FY09, non-BFSI/retail verticals will have to grow at a higher rate of around 6-15 per cent q-on-q | ||
Tata Consultancy Services, India's largest IT services provider, does not provide guidance. But its gross hiring is likely to be revised downwards, according to Edelweiss analysts. Moreover, it has to make a clear statement on the key troubled banking, financial services and insurance (BFSI) segment for investor comfort since it has the highest exposure to the sector among the top five Indian IT majors.
Analysts expect Wipro to register a modest outperformance (or at least be in line with the guidance) on revenues vis-à-vis guidance. However, forex losses are likely to be significant, given its large forward covers. With a focus on utilisation, the company's employee addition could be subdued in this quarter as well. Performance of Infocrossing, Unza and headcount addition will be closely watched. Attrition rates, management guidance on future growth prospects and growth in the non-US markets (especially Asia-Pacific) will be other issues to look out for.
Satyam Computer Services, on its part, could bring dollar guidance down by 1-2 percentage points, say Edelweiss analysts. Enam analysts expect deviation from the past growth trends with the volume growth dipping. Wage hikes across the company in this quarter will, meanwhile, put pressure on the margins. Headcount addition and a revision of the annual guidance are to be keenly watched.
HCL Technologies should set the tone for FY09 performance as it finishes its first quarter. The rupee depreciation benefit may be available this quarter as near-term hedges were cancelled in the last quarter, resulting in effective hedges of only about $300 million for MTM loss. Enam analysts expect decent volume growth of 4 per cent for this quarter. The management's take on headcount, Axon strategy and the future growth will be keenly watched.
In the mid-cap segment, analysts expect Patni to register flattish revenues; MphasiS to continue decent growth in its IT services volumes, though its BPO revenues may be under pressure. Investors will have to watch out for comments on the HP-EDS merger impact. The rupee depreciation is expected to aid revenue growth and operating margins of Hexaware, but its $196-million forex position may have significant impact on other income due to mark-to-market (MTM) losses.
The MTM of foreign currency convertible bonds (FCCBs) is again expected to impact the profits of Rolta, while Mastek is predicted to see increased traction from existing clients. Infotech, according to Edelweiss analysts, will see its GIS growth picking up, while engineering will continue its high-growth traction. Tech Mahindra, say Enam analysts, can expect sequential revenue growth of 4 per cent with a slight improvement in margins. A ramp-up in BT deal is to be looked out for.
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Why this turmoil? Around 55-62 per cent of Indian IT exports are to the US. The service offerings that may experience low or delayed spend are new application development, consulting, testing services and infrastructure management services.
The debacle in core verticals of BFSI/retail (around 30-52 per cent of revenues) has led to an uncertainty. With a contracting IT spend, Indian vendors with just around 4-5 per cent market share are unlikely to grab a higher market share from key competitors (IBM, Accenture), which now have creditable Indian offshore centres, caution Enam analysts.
Thus, existing utilisation rates may further decline, in turn, impacting margins.
This will not only impact volume growth and pricing, but could lead to a higher bench and debt write-off. The analysts note that a 2-3 per cent exposure to a bust client can impact PAT by 4-5 per cent. Thus, y-o-y growth rates have the potential to fall from around 20-25 per cent to approximately 15-16 per cent.
Religare analysts see volume growth of the firms ranging between 5 and 7 per cent. The revenue growth in rupee terms is projected at 6-9 per cent due to the sharp 10 per cent depreciation of the rupee against the dollar in the second quarter of FY09. Moreover, a major dampener during the quarter was the sharp appreciation of the dollar against the euro, pound, and the Australian dollar too. This is expected to impact the Q2 FY09 dollar revenues of IT players.
Edelweiss analysts conclude there are three factors that investors must pay attention to. First, specific leading indicators of a slowdown in tech spending in evidence since a slowdown in new licence software product sales (ERP) may translate into downstream impact on service providers (Indian IT companies) in two-three quarters' time as Indian IT companies get about 30-35 per cent of their revenues from package implementation from implementation of new licence.