Seasonal call

Analysts are estimating 7-10 % revenue growth for most IT majors in Q1

With results season kicking off next week, the technology sector is going to be crucial in determining the direction of the market.

Expectations are high, not only in terms of corporate performance, but the fact that tech companies are touted to be the best defensive plays in the market. Most tech companies are debt-free and will remain immune to interest rate hikes.

The March quarter performance had been only ordinary, but the outlook changed because of Infosys's strong guidance of a 30 per cent top line growth and 26-28 per cent net profit growth in FY07.

Along with the market fall since May 10, tech companies too have declined, but the BSE IT index has fallen 10.56 per cent against the Sensex fall of 16.67 per cent.

Global IT expenditure is expected to grow at 6 per cent this year, and Indian companies are expected to grow at a fast clip. Analysts are estimating 7-10 per cent q-o-q revenue growth for Infosys, Satyam and TCS.

In case of Wipro, IT services is expected to grow at 6 per cent, though consolidated revenues are expected to be flat.

Companies are expected to benefit from strong top line growth owing to the rupee depreciation of 3.2 per cent and 8.34 per cent q-o-q at end-June 2006 against the dollar and euro, respectively.

Analysts are unanimous in ascribing recruitment to be the key concern as supply of quality professionals is limited and large MNC players such as IBM and Accenture are on a large-scale recruitment drive to service the increasing demand.

So, there is going to be pressure on salaries for all companies. Analysts estimate wage hikes of 5 per cent and 15 per cent for onsite and offshore employees respectively.

Plus, companies have ramped up recruitments substantially, so that too will impact the wage bill further. Thus, higher wages are going to result in pressure on margins. But if the top line will benefit from forex appreciation, companies are likely take a hit on other income owing to forex losses on account of hedging.

At the net level, profitability growth at Infosys is estimated to be the highest at 5-7 per cent, while that of TCS will range between 2-4 per cent.

Going forward, the outlook is likely to be bullish as companies would have effected salary hikes and the September quarter is strong in terms of demand and deployment.

Plus, large multi-million orders will start flowing in. Valuations of IT companies-Infosys, TCS and Wipro estimated FY07 P/E range between 22 and 25 "" are reasonable and the sector should do well unless there are negative surprises.

Punj Lloyd: Bumpy ride

Punj Lloyd has reported 2.64 per cent y-o-y growth in consolidated operating profit to Rs 174.19 crore in FY06, despite net sales dipping 5.9 per cent to Rs 1684.6 crore.

For an engineering company, these numbers are surely surprising as the sector has done well in the last year, but analysts point out that this dip in net sales was owing to delays in execution of two road projects.

To the company's credit, it has ramped up the share of higher margin pipeline and tank business in FY06 to approximately 73 per cent of net sales from 49 per cent a year earlier.

Also, Punj Lloyd's order intake grew approximately four-fold in FY06 to Rs 4,500 crore, say analysts. Punj Lloyd had earlier raised Rs 642 crore via its IPO priced at Rs 700 a share.

The company's utilisation of IPO proceeds includes Rs 306.4 crore for prepayment of debts, Rs 70.5 crore for capital equipment and Rs 20.3 crore for equity investment in infrastructure projects and joint ventures.

The Punj Lloyd stock had hit a high of Rs 1,212, but since then it has come back to its issue price. Apart from focusing on higher margin businesses in FY06, the company has kept a tight check on operating costs.

For instance, staff costs fell 12.26 per cent y-o-y to Rs 186.1 crore in FY06, while other expenditure declined 23.36 per cent to Rs 423.7 crore. As a result, consolidated operating profit margin rose 86 basis points y-o-y to 10.34 per cent in FY06.

Punj Lloyd had earlier acquired Singapore-based SembCorp Engineers. This overseas company's business model essentially entails design and project management consulting, while the construction portion of the project is outsourced.

Clearly, for Punj Lloyd this acquisition offers tremendous synergies. However, the street appears to have factored in the growth opportunity for the company, with the stock trading at nearly 28 times estimated FY07 earnings.