The Hindu Business Line : A disappointing Q1 seen for tech cos

Outlook
Impact from rising salaries may be 200 bps, and that due to the rupee 160-200 bps.
Higher yield on cash balance, forex gains will partially offset the sharp EBITDA decline.
Perked-up utilisation, upward movement in pricing may soften the blow somewhat.

Moumita Bakshi Chatterjee

New Delhi, July 5 Even as it raises a toast to an upbeat annual forecast by Nasscom, the Indian IT sector - now headed for first quarter results - may have little to cheer.

Faced with double whammy of sharp rupee appreciation and wage hikes, leading IT companies could witness a margin decline of up to 200-400 basis points, in what analysts term as a “disappointing” first quarter.

“We expect a disappointing Q1FY08 performance – in line with expectations. While the revenue growth in dollar term continues to be strong at 5-9 per cent quarter-on-quarter, the negative margin impact of rupee, wage increases for some companies and visa costs, is expected to result in marginal decline (between 350-400 basis points quarter-on quarter).

“Higher yield on cash balances and forex gains will partially offset the sharp EBITDA decline,” says Citigroup in its pre-earnings report, which bases the preview on Rs 41/dollar assumption.

Citigroup sees Infosys revenue at an estimated Rs 3,821.9 crore for the quarter ended June, for TCS at Rs 5,209.6 crore, Satyam at Rs 1,811.5 crore and HCL Technologies at Rs 1,605.8 crore.

Rising salaries

Leading analysts tracking the sector expect the quarter to be a “disappointing” one for IT firms, where impact on account of rising salaries could be 200-basis points, and that due to the rupee 160-200 basis points.

Mr Ashwin Mehta, Senior Research Analyst at Ambit Capital, says positive factors such as perked-up utilisation and an upward movement in pricing may soften the blow somewhat. “Overall, this may ease the impact on margins to about 300 basis points,” he said.

For the first quarter, Ambit Capital sees 290-basis points impact on margins in case of Infosys Technologies while for Satyam, the hit could be to the extent of 100 basis points. “This is because Satyam had guided at Rs 42.30 against Infosys’ Rs 43.10. Also, Satyam salary hikes come in the second quarter,” Mr Mehta said.

An analysts with BRICS Securities said the firm expected all IT companies to be hit badly due to rupee appreciation by more than six per cent from the average realised rate of Q4 2006-07.

“We have built in EBITDA margins falls ranging from 100 basis points for Wipro to more than 450 basis points for Infosys and TCS for Q1. Similarly, we expect the rupee revenue growth to be muted (around three per cent) during the quarter,” the analyst said.

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