Improving outsourcing demand may bring cheer to IT firms

An improvement in demand for outsourcing services is set to cheer up IT exporters for the second consecutive quarter.

As Infosys looks to flag off the September-ended quarter results, which also tends to be the strongest quarter for IT exporters, investors are looking eagerly towards these set of numbers.

Analysts that Business Line spoke to believe that the top IT exporters are expected to post 3-5 per cent revenue growth over the previous quarter, a trend which generally plays out in the second quarter, a seasonally strong quarter for IT companies.

According to a report by Credit Suisse research analysts Anantha Narayan and Sagar Rastogi, revenue growth could be strong, which could boost margins by as much as 200-300 basis points or 2-3 per cent.

The rupee has depreciated around 10 per cent against the US Dollar, Pound and Euro in the last quarter.

Infosys is expected to post three per cent quarterly revenue growth, lesser than IT bellwether TCS which is expected to post 5.4 per cent in quarterly revenues, according to Credit Suisse estimates.

Hedging strategy

Currency volatility, which has been going on for the past 2 years, on has forced some companies to change their hedging strategy. TCS does not give out the amount that has hedged but in a recent call said that it had a currency related impact of Rs 282 crore.

Similarly, Infosys has said that it will look at its hedging strategy on a quarterly basis and sees no reason to change this. For the 2013 fiscal, forex gains for Infosys were estimated at around Rs 250 crore. Wipro, in a recent analyst call, said that it had $2.1 billion in forex contracts at Rs 53.96.

According to Tata Capital Analyst Ashish Aggarwal, unrealised gain or loss resulting from appreciation or devaluation of a currency in which receivables are billed, which helped negate some of the hedging losses, will not help exporters due to the continued sliding of the rupee.

“Most IT companies may show forex losses as they were hedged in the Rs 58-60 range,” said Ankita Somani, IT & Telecom Analyst, Angel Broking.

Despite this, management commentary in the last few months point to an improvement in outsourcing demand despite concerns over placement clauses for IT workers in the recently passed Immigration Reform Bill. However, the Bill still needs to be passed in the US House of Representatives.

MID-CAP firms

The traditionally strongest July-September quarter would be a better quarter for the mid-tier IT companies on improved outsourcing and demand, and higher profits.

“The quarter looks good for the mid-cap companies, with a decent growth expected to come in dollar-revenue terms. We expect every mid-cap company to benefit from the depreciation of the rupee, with the negative of the wage hike to be more or less absorbed the rupee depreciation,” Angel’s Somani said.

On an average, the rupee had depreciated by 11-12 per cent on a quarter-on-quarter basis (QoQ) against the dollar.

“For tier-II companies, we expect growth to be modest at 2.0-5.5 per cent (QoQ), with KPIT Cummins and Hexaware leading the pack. Hexaware Technologies gave a healthy growth guidance of 3.5-5.5 per cent on a sequential basis and historically its management has proven its credibility by either matching or exceeding the growth guidance,” Angel Broking said in a report.

ICICI Securities expects Persistent Systems and MindTree to lead its mid-cap pack, posting a revenue growth of 5.2 per cent and 4.2 per cent, respectively on a QoQ basis.

“…whereas Infotech and NIIT Technologies are expected to lag with sub-2 per cent growth in dollar revenues. However, we expect growth trends to improve meaningfully for Infotech and NIIT Tech in the second half of FY14, consequently driving margin expansion and potential rerating as well,” ICICI Securities said in a report.

The equity research firm expects MindTree to post forex gains of $1-2 million in the second quarter of the year.

Analysts at Morgan Stanley Research, for whom MindTree is the preferred mid-tier stock, expect the companies (MindTree and Infotech) to report 250-300 basis point improvement in margins on a QoQ basis.

According to the research firm, Tech Mahindra’s three per cent QoQ growth should further drive the stock. Most analysts have placed Tech Mahindra among the mid-tier companies, while they might move it to the tier-I companies following the Satyam merger.

“Apart from the rupee, the revival in the US economy would be another factor helping the Indian IT companies,” said Jagannadham Thunuguntla, head of research at SMC Global Securities, adding, KPIT Cummins and Hexaware Technologies are other companies expected to post decent profits.

>venkatesh.ganesh@thehindu.co.in

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