Business Standard

Tech results: Subdued times

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Niraj BhattAmriteshwar Mathur Mumbai
There are no business concerns, but rupee appreciation and salary hikes are a cause for worry.
 
The technology sector results will be dominated by two factors, the rupee appreciation and salary hikes. The impact of the rupee will be felt by all the companies as the domestic currency has strengthened against most currencies.

It has appreciated by an average 6.7 per cent in Q1 FY08 compared with the March 2007 quarter. It is up by more than 5 per cent against the pound and above 4 per cent vis-a-vis the euro.

There are, however, no concerns on the business side. The revenue growth of the top software companies is likely to be around 8 per cent q-o-q in dollar terms, and about 1-2 per cent in rupee terms.

Most tech companies will be impacted by the wage hikes, with the exception of Satyam and Wipro as there are no hikes in the first quarter.

Analysts estimate a 12-15 per cent hike in offshore salaries and 3-5 per cent in onsite salaries. There will be some negative impact due to visa costs too. The new contracts are expected to yield higher billing rates, by 3-5 per cent, which in turn should help the margins.
 
The utilisation rates and cost management, especially in selling, general and administrative expenses, should be better as well, say analysts. But the operating margins are likely to be down by about 150-200 basis points q-o-q.
 
The companies are also expected to scale down their rupee guidance for the full year. The tech sector has underperformed the BSE IT index. It is up by a mere 2 per cent since the beginning of Q1 FY08 against the Sensex gains of 15 per cent.
 
Analysts are bullish on tech companies as they believe that the negatives are factored in the stock prices, as long as the results do not surprise otherwise.
 
HDFC Bank: Robust as always
 
It was yet another quarter of consistently solid performance as HDFC's operating profit grew by 41 per cent, while the net profit was up by 34 per cent to Rs 321 crore.
 
The bank's net interest income grew at 27.5 per cent, slightly lower than analysts' estimates though its profit growth was higher than market expectations.
 
The improvement in profitability was on account of a 77 per cent growth in the other income as the foreign exchange and derivatives revenues grew by 160 per cent, accompanied by a 28 per cent increase in fees and commissions.
 
The bank also posted a 20 basis point improvement in its operating costs as a percentage of net revenues, despite the addition of 69 branches in the quarter.
 
The net advances grew by 32.7 per cent, while deposits were up by 34.6 per cent. Retail advances declined from 60 per cent of net advances in Q4 FY07 to 57 per cent in the last quarter. The NPAs were maintained at 0.4 per cent.
 
Also, the proportion of low cost deposits remained above the 50 per cent mark. The net interest margin, which was slightly more than 4 per cent in Q4 FY07 and 4.1 per cent in Q1 FY07, went up to 4.2 per cent.
 
The bank plans to raise Rs 4200 crore to increase its capital adequacy ratio and fund loan growth. It has already raised Rs 1390 crore from HDFC Limited in the last quarter. After adjusting for capital infusion, the bank trades at an estimated book value of 3.4 times for FY08.
 
However, the stock declined 1.7 per cent as banking stocks were weak on the bourses on Tuesday.
 
Capital goods: Engineering performance
 
The BSE Capital Goods index has been one of the best performing sectoral indices in the last three months. It gained nearly 39 per cent during this period as compared with a 14 per cent rise in the Sensex.

The investors seem optimistic that the upturn in capex cycle would help the large players to report an improved performance in the June 2007 quarter.

Also, operating profit margins of companies are expected to rise on a y-o-y basis in the last quarter, as the recent contracts won by the engineering companies allow them to pass on higher input costs.

Analysts forecast that heavyweight Larsen & Toubro would post a revenue growth of about 25 per cent y-o-y in Q1 FY08, and its operating profit is projected to grow at around 50 per cent. BHEL is also expected to expand its operating margins by 50 basis points y-o-y in Q1 FY08.

ABB is expected to report a 40 per cent y-o-y growth in its revenues in the June 2007 quarter, while its operating profit should grow by more than 50 per cent. L&T trades at about 30 times estimated FY08 earnings, while for BHEL it is 25 times. ABB is discounted at 30 times its estimated CY08 earnings.

 
 

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First Published: Jul 11 2007 | 12:00 AM IST

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