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Monday, Jul 08, 2002

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First-quarter outlook — IT sector not expecting fireworks

Neha Kapoor

Increased hiring, seen as a sign of recovery in the sector, would have a beneficial effect on the software education business albeit in the long run.

MUMBAI, July 7

IT'S that time of the year again! Most IT companies will be announcing their first quarter (Q1) results shortly.

And things being as they are, it would not be far fetched to say that the markets are not expecting any fireworks. For this quarter, margins are expected to be flat — maintained mostly by cost cutting — while volumes are expected to show a marginal increase and pick up thereafter.

``Quarter-on-quarter growth for the tech sector will be more or less flat and there might even be an year-on-year decline. Growth for this fiscal will be back-ended with things picking up in the third and fourth quarter as compared to a front-ended growth last year where business was relatively good in the earlier quarters,'' said Mr K. Ramachandran, Head, Research, Tata TD Waterhouse Securities Ltd.

Some companies, though, are expected to buck the trend with growth rates higher than industry average, said analysts. Among top rung companies, Digital Global is being touted as an outperformer while second rung companies such as MphasiS BFL, driven by the MsourcE story, and Polaris, gaining from the Orbitech acquisition, are being projected as `strong performers'.

On a broader platform, analysts said that billing rates in Q1 have declined — some peg it at one per cent while others at around 5 to 10 per cent on an average.

According to a Q1 result outlook report by Refco-Sify Securities Ltd, ``Most companies have indicated that billing rates have stabilised and further fall is arrested. However, full impact of the drop in billing rates last year could result in lower average billing rates during the quarter.''

And the pressure is likely to continue for sometime.

``Billing rates will show a de-growth this quarter and are likely to continue being under pressure for another quarter or two before they stabilise,'' said Mr Sandeep Shah, Analyst-Equities, Pranav Securities Ltd.

One positive for the sector, said analysts, is that Q1 has seen an increased `burning up of the bench' and utilisations rates are expected to move from 60 - 70 per cent to around 75 per cent.

``Most large companies have decided to start recruitment process, reflecting their confidence in the future and increasing levels of utilisations,'' according to the Refco report.

Increased hiring, seen as a sign of recovery in the sector, would have a beneficial effect on the software education business albeit in the long run.

``Even when recruitments increase students will be wary of enrolling for courses until they are sure of a sustained recovery. Besides, the education business has changed — now niche courses catering to professional needs have become important,'' said Mr Ramachandran.

It may be recalled that along with announcing financial results for 2001-02, almost all top companies had announced forays into the business process outsourcing (BPO) domain. However, these initiatives are not expected to contribute substantially to company turnover immediately. ``The BPO model is highly scalable but it will show results only after two to three quarters. Also, the base is crucial for companies: for a company like Infosys, which has a huge base, it will take longer for a BPO operation to start making a considerable difference to its performance,'' said Mr Ramachandran.

More clarity on the BPO business models, though, is something that is expected with the announcement of quarterly results. ``This quarter, we can expect most companies to announce a `BPO matrix' wherein they would make known their business models as well as client acquisitions if any,'' Mr Shah said.

In terms of stock valuation, analysts said that the current low valuations of most tech shares make them attractive buys. And in the run-up to the results, tech stocks have witnessed a modest rise in prices, attributed mostly to expectations that companies would meet their guidance.

The Refco-Sify report stated, ``we believe the low expectations from Q1 performance and depressed valuations could result in a sharp rally in the IT stocks, once the results are out.''

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