IT MAJORS LIKELY TO LOG 6.9 PERCENT NET, SALES GROWTH

Nishanth Vasudevan & Ranjit Shinde, Mumbai
The Economic Times

Top software companies may log a 6.9 percent rise in sales and net profit in the October-December quarter sequentially, a growth considered reasonably strong by analysts in a period that has been otherwise slow in the past many years. Earnings growth usually slowdown in the Oct-Dec quarter, as there are lesser billing days because of more number of holidays.

As a result, analysts feel investors are unlikely to base their sectoral investment decisions on this quarter, also with concerns over a recession in the US. It is feared that a recession is likely to lead to a cut in IT budgets of companies there, especially in the banking and financial sector.

“Though investors may discount any positive data points from the December quarter results, given the uncertainty around technology spending in the US for 2008, any negative data points could be extrapolated as a sign of an impending US slowdown/weakness,” said Morgan Stanley in a pre-earnings note.

While the market is anticipating some critical comments from companies on what lies ahead, analysts feel any decisive statements on the impact of a possible slowdown in the US is unlikely. A key aspect that the market would be looking for is the recruitment figures, as companies hire more in anticipation of increased business prospects.

“We do not expect any definitive indication on demand going into FY09 and the earliest indication of that demand would be from Cognizant’s results expected on Jan 18th, 2008. The market might have to wait for Q4 results to get a more definitive idea on demand trends for FY09,” said Ambit Capital said in a pre-earnings note.

CLSA said investors might need to wait till January-end to gain a concrete idea about the trends in offshoring demand. “Past slowdowns have been identified in the Feb-Mar period rather than in Nov-Dec, lending credence to the overall waiting stance pre-full year guidance in April from Infosys and Satyam,” CLSA said.

Analysts expect improvement in companies’ operating margins, though marginal, thanks to the limited appreciation in the rupee against the dollar. But, industry margins may be divergent because of different currency hedging strategies and that companies have taken wage hikes into their books at various periods.

“We may see a slight improvement in margins given the aggressive hedging done by the companies during the quarter and a near stable rupee-dollar relationship,” Ventura Securities’ research head, Subramanyam Pisupati said.

In the quarter under review, the rupee has appreciated 2.3 percent against the dollar and 1.3 percent against the UK pound from the July-September quarter. Last year, the rupee rose roughly 12 percent against the dollar.

On wage hikes, brokerage Sharekhan said, “The operating margins of Infosys, TCS and Satyam Computer (Satyam) are estimated to improve sequentially with the impact of wage hikes already reflected in H1 and relative stability on the exchange-rate front. On the other hand, partial wage hikes affected by Wipro and HCL Technologies in Q3 would dent their margins.”