Rising Re may hit IT cos revenue

Kavita Kukday / TNN / Jul 9, 2007, 00:04 IST

Text Size

Small
Medium
Large

Indian software companies may find the going tough this quarter.

MUMBAI: Indian software companies may find the going tough this quarter. As tech major Infosys kicks off the April-June quarter (Q1FY08) results season on Wednesday, stock market players are keeping their fingers crossed and wishing the Bangalore-based company doesn't revise its full year profit figures downward.
Brokers and analysts expect most IT companies to report a decline, or at best flat growth, in profits for the quarter just ended, they don't expect the respective stock prices to fall much as a result.But any downward revision in profits would surely affect their stock price.
The first quarter is traditionally the weakest for IT companies due to the cumulative effect of the incremental cost of visa charges, the inflow of fresh engineers from campus put under training and are non-billable to their clients and the annual salary hikes. But this year the appreciating rupee has added to the woes of the technology majors, since the second quarter predictions look bleak too.

In the past six months alone the rupee saw an appreciation of 8.5% against the dollar, closing at 40.44 on Friday. With average exchange rate at Rs 41.2, it is much higher than the rate of Rs 42.3-43.1 assumed by most domestic IT companies while they gave their yearly guidance in April. For instance, Infosys guidance had pegged the rupee at 43.1, while Satyam pegged it at Rs 42.3. In fact, unlike the previous quarter when it was gaining only against the dollar, the rupee also appreciated against all the other major currencies such as the euro and pound sterling in Q1 FY08. On a weighted average basis, the rupee appreciated by 5.9% against the basket of three major currencies.

This rising rupee has put a tight squeeze on earnings thus cutting operating margins by about 2.5 percentage points since mid-2006. TCS' operating margin for instance was 25%, compared to 25.5% for the year before.
The strength of the rupee has prompted marketmen to take a bearish view of the IT stocks. While, Infosys' stock price has dropped almost 14% since the beginning of this year, since April 13, when Infosys announced its results, the IT Index on BSE has fallen by 5.5% even as the overall market index rose 11%.
According to analysts, the future will only get worse. "For every 1% rupee appreciation the companies stand to lose 45-50 basis points (100 basis points= 1%) in the next quarter given other factors such as inflation remain constant," says R Ravi of Karvy Stockbroking.
The average wage hike of around 14-15% for the offshore employees and of 3-5% for the onsite staff would translate into an adverse impact of 250-350 basis points on the operating profit margin (OPM). This is in addition to the 200-basis-point pressure from the rupee appreciation and around 50-100-basis points impact of the other seasonal factors like higher visa cost and intake of fresh graduates.
Consequently, analysts expect a 350-400-basis-point sequential decline in the OPM of Infosys and TCS during the quarter just ended.
Infosys will suffer the worst (14%) because of the one-time tax credit that they had taken, while others should see a 7-8 % dent in their operating margins. While tier 2 IT companies could witness more pressure because their margins are tighter.

End of Article