The Hindu Business Line : Curtain-raiser

The sector is slowly recovering from a nasty jolt suffered in the second/third week of April, when the earnings card of the two giants, Infosys Technologies and Tata Consultancy Services (TCS), fell short of market expectations.

While Infosys spooked the markets with lower-than-expected earnings guidance for 2005-06 and a flat first quarter, TCS followed with a disappointing fourth quarter for 2004-05. Though the earnings card of Wipro and Satyam bucked the overall trend and helped the markets stage a comeback, some niggling doubts about the demand environment in the US have persisted.

The first quarter may turn out to be significant, not only for the frontline software companies, but also for the mid-caps.

At least two mid-cap companies, Hexaware Technologies and Geometric Software, have indicated that slow or delayed project starts or employee visa availability from a key client/clients may lead to lower earnings growth in the first quarter of 2005-06. The company management have, however, reassured that this is only a temporary blip. It will be interesting to watch how they perform this quarter and the pointers they offer to the future.

In this backdrop, analysts, investors and industry observers will be watching four key variables in this quarter's earnings card from the frontline (and to some extent, mid-cap) companies:

Guidance-extension of past trends

: Infosys, the tech bellwether, has traditionally been conservative in its earnings guidance for the first quarter (and even for the year), if the past three years' guidance is anything to go by. But in the past, Infosys has cited a number of reasons ranging from geo-political and other concerns (such as war in Iraq to SARS virus), appreciation of rupee, pricing pressure to outsourcing backlash, for relatively sluggish guidance, generally in the first quarter.

And it is interesting that in every single year since 2002-03, it has outpaced the earnings guidance by a long chalk. However, for the first time, Infosys has talked about some of its clients, a handful of them going through some organisational changes and some others in the financial services area slowing down on spending on account of compliance issues. Though other players have already indicated that compliance issues have not bogged down their client spending, it will be interesting to see if this is borne out by their performance vis-à-vis Infosys.

Client profile

: For three of the top four frontline companies, the growth in revenues from the top five clients has been slowing down. A significant proportion of the growth has been coming either between top five and ten bracket or clients beyond the top ten. While this is an encouraging trend, since it broadbases the overall client profile of these companies and creates greater opportunities for growth in different revenue milestones (say, $1 million, $5 million and $10 million clients), it also highlights another issue. The issue is whether clients are reluctant to scale-up with existing vendors beyond the $40-50 million bracket. Beyond this level, clients either choose multiple vendors or impose some kind of offshoring limit with a particular vendor. Though there are not enough data points to confirm this trend, especially for all clients in the top five bracket for vendors, this is something which will be closely tracked every quarter.

New service lines/geography

: Though new service lines, be it package implementation, infrastructure management, testing, BPO and consulting (business, technology and quality) have accounted for over 25-30 per cent of revenues of the top five frontline companies, all ears will be trained on greater clarity on the potential, sustainability and growth of these revenues. Ditto for the potential of new geographies such as the Asia-Pacific and Europe.

Demand environment/pricing upside: A cross-section of CEOs from frontline and mid-tier companies hold the firm view that even if a slowdown in the US happens, offshoring to India will not be affected. They claim that the offshoring momentum is now too strong for Fortune 500/ Global 1000 companies, unlike 2000-01, to reverse course in any material way. At the same time, they admit that even though pricing has remained stable for the past five to six quarters, the possibility of upside has been limited on existing client accounts on account of competitive pressures. The pointers from the senior management on this aspect will be keenly tracked.

maverick@thehindu.co.in

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Stuck, for now

The eye of opportunity

Quiz

Performance on four pillars of knowledge

Cartoon