With the dollar falling almost continuously now, the Indian software industry is expected to offer conservative earnings guidances. The dollar closed at Rs 43.15 on Monday, the first day of the financial year, and analysts feel margins of most information technology and enabled services companies are expected to be under pressure.
Although the last quarter (January-March 2006) results are expected to be robust, analysts feel that future earnings will be affected because the bulk of the infotech industry’s income is dollar-denominated.
According to estimates by Morgan Stanley, revenue growth for 2007-08 for all the big infotech companies would be between 24 per cent and 29 per cent, lower than the 35-47 per cent they posted in 2006-07.
Rohit Kapoor, president of EXL Services, said the appreciating rupee would severely affect infotech margins. “The biggest challenge for the Indian infotech sector is the devaluation of the dollar,” he added.
Morgan Stanley analyst Anantha Narayan contended that the rising rupee would have a negative impact in the fourth quarter of 2006-07 as well. “Significant rupee appreciation is the only major risk we see at this point,” he pointed out.
The chief financial officer of one of the big five infotech companies said on the condition of anonymity that fourth quarter results were expected to be on the line of earlier guidances. “However, the dollar’s depreciation is a double whammy as the sector is facing the heat of a US slowdown,” he added.
At the end of the third quarter of 2006-07, infotech companies had based their guidance a Rs 44.10-44.30 exchange rate band to the dollar. Against this, the dollar has ended at Rs 43.15 at the end of March 2007, and new guidance is expected to be lower, given the sharp increase in wage bills and a slowdown in the US economy.
The industry has taken forward cover of $2.5 billion. “Given an extra element of conservativeness in Infosys’ guidance for 2007-08, it will be a key stock price driver for the sector,” said Narayan.
With the base widening, volume growth in the March quarter will be similar to or slightly below that in the December quarter—7-9 per cent. In the December quarter, volume growth for TCS and Wipro was 8 per cent and 9 per cent, respectively, while Infosys and Satyam reported growth of 7 per cent and 7.5 per cent, respectively.