IT quartet clicks again on slower rupee rise

The four big software companies, which had reeled under the impact of the rupee's appreciation against the US dollar in the first quarter of this financial year, fared better in the second, posting results in line with or slightly better than market expectations. It helped that the rupee's appreciation slowed down.

Efficient foreign exchange hedging, better employee utilisation, hiring of fresh personnel to offset wage hikes, strategic acquisitions and wins across all business verticals helped Tata Consultancy Services, Infosys, Wipro and Satyam post double-digit growth in revenue in July-September this year compared with April-June. That was a welcome change after three quarters of single-digit sequential growth.

The quartet posted average net profit growth of 5.58 per cent in July-September, a heart-warming figure after the 5.73 per cent drop in the first quarter.

Still, the figure pales in comparison to the net profit growth of over 12 per cent in the fourth quarter of the last financial year, the era in which the rupee traded in the mid- to high-forties against the dollar, and over 8 per cent in the quarter before. 
 

WINSOME FOURSOME
(In %)	Q/Q growth in revenues (quarter ended)
	Dec-06	Mar-07	Jun-07	Sep-07
Infosys Tech.	5.91	3.20	0.03	8.83
Satyam Computer	3.70	7.11	2.87	11.01
TCS	8.42	5.92	0.79	8.40
Wipro	0.74	11.20	6.63	12.95
Total for top four	5.10	6.71	2.43	10.11
	Q/Q growth in net profit (quarter ended)
Infosys Tech.	5.81	16.36	-5.76	1.95
Satyam Computer	5.45	16.71	-3.88	8.13
TCS	10.16	6.89	0.48	3.26
Wipro	9.26	11.91	-15.28	13.55
Total for top four	8.08	12.01	-5.73	5.58

This financial year, things changed drastically as the rupee appreciated nearly 7.2 per cent in the first quarter and followed it up with 1.65 per cent in the second.

"The rupee remains the single largest concern for IT companies. The results indicate that only if the rupee appreciates gently will the IT firms be able to absorb the hit by improving their operational efficiency and productivity," says Krupal Maniar, research analyst at ICICI Securities.

Seconds Harit Shah, a research analyst at Angel Broking: "Wage pressures on margins are bound to continue. One will also have to wait for the effect of the subprime crisis to be fully known."

Infosys Technologies and TCS underperformed Wipro and Satyam Computer. The latter two posted double-digit revenue growth while the first two remained mired in single digits.

A healthy 7.5 per cent growth in global IT business revenues, thanks mainly to the acquisition of Infocrossing, which contributed Rs 25.4 crore, lifted Wipro's overall revenue growth. Its operating margin before factoring in the impact of foreign exchange fluctuation fell 120 basis points as offshore salaries rose 12-15 per cent from August 2007.

TCS posted decent revenue growth, but its margins were narrower than expected. Its pricing improvement of 0.85 per cent too was relatively tepid.

Infosys Technologies was back on track, posting 8.8 per cent revenue growth after a flat to modest sequential growth in the preceding three quarters.

Infosys' operating margin improved 260 basis points, much higher than TCS' 77, mainly due to higher employee utilisation and lower visa costs. Billing rates, which rose 3-4 per cent for new contracts and 2-3 per cent for old ones coming up for renewal, helped a lot.

TCS, though, managed to negotiate better billing rates with new clients, an increase of over 5 per cent, and 3-5 per cent for renewals. Wipro Technologies' billing was flat and is expected to stay that way in the third quarter.

Wipro added 59 new customers in the quarter, TCS 51, Infosys 48 and Satyam 37. TCS managed its employees better. Its attrition rate was 11.5 per cent even as Satyam suffered 13.9 per cent, Infosys 14.2 per cent and Wipro 17.9 per cent.

So far so good, but falling margins bode ill. "As they (IT companies) become global players, they have to compete with MNCs in a highly competitive environment. Billing rate hikes merely offset inflation.

And there's not much scope to further improve employee utilisation. IT firms still manage the bench in India. They need to expand to high-cost geographies too. In the short term, the markets will shun them. But they have to make this long-term decision," says Sid Pai, partner at research and advisory firm TPI.