The fear factor

An appreciating rupee is expected to mar information technology industry numbers.

The information technology sector is going to be in focus this week as the market starts building expectations on Infosys' results and its guidance, which will be announced on April 13.

The BSE IT index has underperformed the Sensex since the beginning of 2007 - the IT index has fallen 6.5 per cent, while the Sensex is down 4.4 per cent.

The reasons are not unknown either - the rupee has appreciated against all major currencies. The rupee is up 1.77 per cent against the dollar, about 0.7 per cent against the euro and 1.96 per cent versus the pound during Q4 FY07 over the December quarter.

With the appreciating currency, there will be an impact on both the top line and the bottom line when accounts are translated in rupee terms.

Even in the December quarter, the rupee had played spoilsport for technology companies as it had appreciated 3.8 per cent during the quarter. As a result, operating margins were 100-200 basis points lower.

For Q4 FY07, TCS is likely to be least impacted by the rupee appreciation because of an effective hedge. Analysts expect Infoys, TCS, Wipro and Satyam to grow their top lines between 5 per cent and 7 per cent q-o-q in the March 2007 quarter.

At the operating level, they expect TCS' margin to improve around 30 basis points, while margins at other three companies could decline by 25-60 basis points. Companies such as Tech Mahindra and Hexaware are expected to grow their revenues between 10 per cent and 15 per cent q-o-q in Q4 FY07.

Thus far, the technology sector has been a preferred investment destination as top line and earnings growth have been assured compared with many other sectors.

However, with fears of a slowdown in the US, analysts are concerned whether tech companies will be able to increase billing rates even if volume growth does not reduce.

The market will be looking at cues from the management in terms of earnings guidance, outlook on the US economy and business growth, and salaries for FY08.

The market will also look at announcements on contracts bagged during the quarter, and trends in billing rates. Analysts say stock prices have corrected before the earnings season, factoring in some of the negatives. The market will not be too surprised as long as earnings growth guidance for FY08 is around 20-24 per cent, in rupee terms, from the top four companies.

Pharma sector: Staying on course

Large generic players such as Ranbaxy and Dr Reddy's are expected to report another buoyant performance in the March 2007 quarter, helped by earlier acquisitions in Europe.

Also, their continued ramp-up in the European generic markets is expected to help offset pricing pressure in the American market, say analysts.

The BSE Healthcare index has moved broadly in line with the Sensex over the past three months "" it has dropped 2.7 per cent during this period, in tune with the Sensex. Meanwhile, Ranbaxy is expected to see sales improve 18-19 per cent y-o-y in the last quarter, helped largely by its earlier acquisition of Romania-based Terapia.

However, in the North American market, its sales are expected to be sluggish due to the expiry of its exclusivity for simvastatin in US in December 2006.

Nevertheless, its focus on emerging generics markets is expected to help Ranbaxy's operating profit expand 45 per cent y-o-y in the last quarter. Ranbaxy's operating profit margin had grown 917 basis points y-o-y to 15 per cent in the December 2006 quarter.

Other generic players such as Dr Reddy's are expected to see sales (including Zofran for which it has a 180-day exclusivity) rise 70 per cent y-o-y in the last quarter.

In addition, growth for Dr Reddy's is expected from synergies with its earlier acquisition of Germany-based betapharm. Its operating profit growth is expected to be in excess of 150 per cent y-o-y in Q4, helped also by a low base effect in the previous corresponding period.

MNC players such as Glaxo are expected to report flat sales on a y-o-y basis in the last quarter, given the divestment of its animal health business. In addition, its operating profit is anticipated to fall marginally on a y-o-y basis in the March 2007 quarter. However, Aventis is expected to see its sales grow 16-17 per cent in the last quarter.

The Street however, appears to have already factored in the growth opportunities for the stocks "" Ranbaxy trades at 21 times estimated CY07 earnings, while Dr Reddy's is at 22 times estimated FY08 earnings. MNC stocks such as Glaxo trade at 22.5 times estimated CY07 earnings.