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India IT firms seen posting strong quarterly earnings
IT firms' results may be strong due to more outsourcing by customers and stable billing rates but high wage bills may hit margins.
Indian software firms are set to post strong quarterly results thanks to increased outsourcing by their customers and stable billing rates, but fatter wage bills cloud their outlook, analysts said.
Profits in April-June for sector leaders such as Infosys Technologies and Wipro, which both topped $1 billion in revenue last year, are expected to rise by between 25 and 77 per cent from a year ago, according to Reuters polls.
MphasiS BFL kicks off the reporting season with its first-quarter earnings on Friday.
Companies have said downward pressure on billing rates has eased, and analysts expect some to report price increases.
"There are two positives -- the decline in billing rates is reversing and the rupee is depreciating," said IDBI Capital Markets analyst R Ravi. "But wage pressures will continue as a result of which margins will not expand much."
Most firms pushed up wages, by 15-20 per cent, from April.
"There's a lot of poaching among Indian companies and also by multinationals," said director of Mumbai-based equity research firm KRIS, Arun Kejriwal.
Global giants such as IBM and Accenture have built large employee pools in India, putting pressure on Indian companies competing for the talent.
Strategist at Pioneer Intermediaries Sandeep Shenoy said there was pressure to raise wages for middle- and higher-level jobs, where experience was in demand, but entry-level wages were falling as there was no shortage of applicants.
Bangalore-based Infosys, India's top listed software services exporter, received a million applications for the 10,000 jobs it advertised in the year ended March. Wipro hired over 9,000 people.
Companies are expected to keep up their hiring rates as business flow increases with global IT spending budgets improving along with a recovering US economy.
India's software and allied service exports grew 30.5 per cent to $12.5 billion in the year ended March, and the industry association expects 30-32 per cent growth in the current year.
"Business traction is certainly picking up and it will gain momentum in the current quarter going by the trend of recruitments in the past four quarters," said Shenoy.
"Quarterly volume growth even in the worst of times was 2.5-3.5 per cent, some of the larger companies may even show 10 per cent quarterly growth now," he said.
GUIDANCE WATCH
Analysts said the rupee's uncertain outlook would probably deter firms from raising their earnings guidance for the year.
"I don't think companies will revise their earnings guidance for the year upwards ... because of the rupee-dollar swing. Two quarters ago, they didn't hedge enough and had their fingers burned. Now they've overhedged," Shenoy said.
The Indian rupee gained 5.24 per cent last year, but has lost five per cent since hitting a 51-month low on April 7.
Some analysts said many companies had hedged export receipts in March, expecting the rupee to continue gaining. The lower rupee was now likely to have wiped out any forex gains.
The Bombay Stock Exchange's IT index has gained 21 per cent since the market crashed on May 17 amid investor fright at a change of government.
The top few companies are trading at 15-27 times forecast earnings, but many research houses remain overweight on the sector, citing an improving outlook.
