IT's Big Four

SMARTSHARE

As far as market-watchers are concerned, four IT companies set the trend for the entire sector.

To some extent, this is a matter of perception rather than fact but share prices are usually influenced by perception. It is also true that the big four hold disproportionate market-share "" the Pareto Principle holds true for IT as it does for most other industries.

Any quarter when Infosys, Wipro, TCS and Satyam beat expectations is likely to have been good for the industry overall. The July-September quarter is always the focus of greater interest because it completes the half-year. Thus far, Infosys and TCS have declared their results and everybody seems to be fairly happy.

Infosys has done over $1 billion in first half revenues (H1 2005-06) and expects to reach the $2.14 billion mark by March 2006. In Q2, 2005-06 with respect to Q2, 2004-05, Infosys logged 31 per cent revenue growth at Rs 2,294 crore and 36.5 per cent net profit growth at Rs 606 crore.

Its full-year guidance is between Rs 9,360 crore and Rs 9,380 crore, which means it expects to maintain 30 per cent growth Y-O-Y. Sequentially, net profit grew 14 per cent over April-June 2005.

The HR front indicates that apparent optimism has been backed by a hiring spree. The workforce has expanded by an incredible 8,000-plus employees in the last quarter, pushing the total headcount to over 46,000.

Infy remains US-centric in revenues with a split of 65 per cent of revenues from USA and 24 per cent from Euro-13. The East Asian operations contribute around 9 per cent with Indian revenues being just about 1.5 per cent.

TCS has less impressive results but TCS has always had somewhat slower growth in both profits and revenues. Part of this is the base effect "" TCS is a larger company though not by that much anymore. The Tata flagship registered Rs 2,982 crore in Q2 revenues with a net profit of Rs 693 crore.

That is 21 per cent revenue growth and 20.7 per cent net profit growth. The TCS headcount stands at over 55,000 employees including a net addition of 4,000-odd employees in the last quarter. The company offers no concrete guidance but it projects "excellent growth momentum" in the near future.

Apart from general buoyancy in the global economy, the IT industry has undoubtedly benefited from a forex scenario that seemed unlikely when the fiscal year dawned. At that point of time, most analysts were concerned about the possibility of the rupee appreciating and putting pressure on IT revenues.

In reality, the rupee has declined over 3 per cent since April and that has been a pleasant bonus for the industry. The trend of a rupee decline may well continue.

Pressures on the currency have arisen from zooming oil prices and there is a rising current account deficit. Oil prices look likely to remain high and, if the US consistently continues to raise interest rates (as seems likely), there will be further pressure on the rupee.

It may be reasonably assumed in this situation that Wipro and Satyam will also come up with Q2 results that meet or beat consensus expectations. So, the next six months look secure enough for the industry. However valuations still look too rich.

The forward PE to EPS growth ratios (PEG) are around 1 or higher for both Infy and TCS and that leaves no room for comfort. Buy on declines would be the advice, I guess.