The Hindu Business Line : Analysts see robust Q3 results from tech firms

A rise in recruitment is usually a reliable indicator of volume growth. Most of the major Indian IT services companies are on a hiring spree over the last two quarters.

Hyderabad , Jan. 4

WITH two consecutive quarters of good performance, the tech sector's third-quarter performance is much awaited, with Infosys, Wipro and Satyam set to lead the charge.

Analyst studies point towards a cycle of upward earnings revisions over the next few months on consolidation of the existing clients and higher recruitment seen over the last two quarters.

According to analysts at SSKI Securities, a rise in recruitment is usually a reliable indicator of volume growth. Most of the major Indian IT services companies are on a hiring spree over the last two quarters.

The pick in demand for skilled workers has led to a rise in attrition rates, which in turn has fuelled even higher recruitment.

These new hires usually start generating revenues over 3-6 months and the higher recruitment reflects the industry's confidence on growth prospects.

Analysts at JP Morgan said that Indian IT companies would benefit from cost-cutting initiatives and internal restructuring of costs.

The changes in the onsite management and the fixed cost model will bring in additional upturn in the business.

While the offshore salaries increase will be lower compared to the past, companies are hiring more college graduates, which will see relatively lower salaries in absolute terms.

Analysts from both these firms believe that large Indian IT companies are set to deliver 25-35 per cent year-on-year revenue growth that will be strengthened by profit growth of about 20-25 per cent.

The second-quarter results of leading tech firms indicated that most companies increased full-year targets, thereby suggesting better traction in the second half.

This is further based on faster decision cycles and relatively lesser pricing pressures.

Interestingly, the volumes are spreading from top-tier companies to second-tier technology companies; this is a broad-based growth across domains and customers.

However, both the companies are of the view that cost controls and higher utilisation remain positive for margins, with challenges from offshore salary hikes and rupee appreciation.

The direction that pricing would take will be key for margins over the next 4-6 quarters.

The rupee has appreciated by about 5.5 per cent since January 2003, which has put some pressure on the margins. But the analysts said that the market had overestimated supply-side risks.

While the demand continues to grow, going forward, the industry could even surprise with higher billing rates.