Techs to have robust Q3

Earnings to rise as tech outsourcing shifts up a to long-term partnerships from piecemeal contracting.

India's booming software firms are set to report robust quarterly earnings as outsourcing of technology services shifts up a gear from piecemeal contracting to long-term partnerships.

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A poll of 10 brokerages estimated quarterly profits jumped between 8.3 and 56.9 per cent year-on-year for service companies, while product firm i-flex solutions ltd., in which Oracle Corp holds a 43 per cent stake, is set to show a doubling of net profit.

A weaker rupee in the October-December quarter, when it slipped about 2.3 per cent against the dollar, could sweeten tech profits. But individual firms could see minor hiccups from salary increases and costs related to acquisitions or large deals.

Analysts cited big deals set to be awarded and large-scale hiring as pointers to strong growth.

The earnings parade in India's $17-billion software and office service export industry -- powered by low-cost English-speaking workers earning a fifth of western wages -- kicks off on Tuesday with mid-sized Aztec Software and MphasiS BFL Ltd reporting their numbers.

But the market will be eyeing bellwether Infosys Technologies, which is set to unveil its results on Wednesday, and will also be focused on its full-year forecasts.

Infosys is expected to post year-on-year net profit growth of 30 per cent at Rs 6.49 billion ($146.4 million), compared with Rs 4.97 billion in the same quarter of 2004/05, while its sales are expected to jump 34 per cent to Rs 25.21 billion on the year.

Tata Consultancy Services (TCS), India's top tech exporter, reports results a day after Infosys, the No 2 player.

TCS will show a yearly rise of 8.3 per cent to Rs 7.37 billion and a strong sequential rise of 6.2 per cent, according to a poll. Shenoy said TCS would rebound from a bad start to the fiscal year.

Earnings began rebounding the previous year as IT firms recovered from an industry slowdown witnessed after the telecoms and Internet meltdowns between 2000 and 2003.

STRATEGIC OUTSOURCING

The top two firms, like MphasiS and No 4 firm Satyam Computer Services, beat analyst estimates in the July-September quarter, while third-ranked, New York-listed, Wipro met expectations.

Analysts said the trend could accelerate in the latest quarter because outsourcing is becoming "strategic" -- implying bigger deals with longer-term contracts.

They said a usual seasonal slowdown related to the holiday season in India and the United States, India's main market, was not visible.

A milestone was reached in the July-September quarter when Infosys, TCS and Patni Computer joined Accenture and IBM in winning a 5-year, $2.2 billion outsourcing deal with ABN Amro Bank.

General Motors is set to award a similar deal in the new year, with firms like Wipro among front-runners.

SBI Capital Markets Ltd said in its quarterly review that companies would focus on client additions and qualitative improvement while volumes surged. Profit margins could rise.

"We believe clients are looking at offshoring strategically and are likely to commit higher volumes in the near future," it said.

Brokerage CLSA said Indian tech companies could now match the investor attractive stocks from other industries in a market where the broader benchmark index hit all-time highs last week.

"Within an India portfolio, techs appear to be re-claiming the earnings growth leadership position," it said."

The Christmas quarter also saw some active acquisitions. TCS spent about $50 million to buy two financial software firms, while Wipro committed about $80 million for two high-tech firms.

Analysts said these augured well for the longer term.

HCL Technologies could see better performance as revenues turn up in some delayed deals, while Wipro has put behind the worst of its growth drag back-office unit, they said.

But Wipro, which raises salaries in October, could see a rise in costs affecting its profit. Wipro is due to report results on January 18 and Satyam two days later.