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Industry Research : Infosys, TCS to Show Sales Growth; Outlook Uncertain
Oct 7, 2011 -- India's software services companies are set to report strong revenue growth when they kick off their quarterly earnings next week, but a slowing U.S. economy and the debt crisis in Europe may crimp orders.
While the sluggish global economy poses a risk to pricing and new orders, a weak rupee may help boost margins of market leaders Tata Consultancy Services and Infosys.
India's showpiece industry gets more than 90 percent of its revenue from providing technology services to overseas clients and counts the United States and Europe as its biggest markets.
"We expect the results to be decent, but the focus will be on their guidance to get a sense of whether clients are postponing spends or expecting price cuts," said Mohit Mirchandani, head of equity at Religare Portfolio Management, which holds IT stocks in its portfolio of around $250 million.
Most of the clients of the companies, which manage computer networks and maintain IT operations for several Fortune 500 firms, usually set their annual budget for the next year by November.
Infosys will kick off earnings on Wednesday and some analysts expect the company will cut its 2011/12 dollar revenue growth target as demand tapers.
In April-June, the company's new client additions were the lowest in at least four years and it had warned in July that it faced a volatile global economy that could slow client spending.
'No Dramatic Surprises'
Tata Consultancy and Infosys are set to report earnings growth for the three months ended September, thanks to a healthy deal pipeline.
They would also gain from a drop in the rupee's value against the dollar during the quarter.
Wipro is expected to see a marginal drop in earnings as salary increases and an acquisition it made in April pressure margins.
Infosys sees the grim economic situation in Europe as its biggest concern and is diversifying into fast-growing markets such as China, its executive co-chairman told Reuters last month.
The CEO of Tata Consultancy has said overall spending in the United States and Europe would stay weak but there would be opportunities as customers embrace new technology.
"We don't expect any dramatic surprises, but what one needs to watch out for is any reading of caution regarding demand going forward," said Harit Shah, IT sector analyst at Nirmal Bang Equities in Mumbai.
"We may see a bit of delay in budgets for FY13," he said.
Technology outsourcing and consulting company Accenture last week reported market-beating results and forecast a strong 2012, allaying fears of an industry-wide slowdown.
Oracle Corp also forecast higher-than-expected earnings for its second quarter as well as robust software sales.
But India's services sector contracted for the first time in more than two years in September as new business all but dried up and expectations weakened amid concern over a flagging world economy, a survey released this week showed.
JPMorgan expects Infosys' margins for the September quarter to increase about 200 basis points from the previous quarter, and TCS' by 50 basis points, due to rupee depreciation.
The rupee, which had suffered its biggest quarterly fall in nearly three years, will however lead to mark-to-market losses on currency hedges taken by the companies.
Investors will also watch hiring plans, seen as a key barometer for demand at these companies.
Shares in Infosys have lost about 26 percent this year, TCS has shed 9 percent and Wipro has lost more than 30 percent.
The sector index is down about 24 percent year to date, and the broader market has dropped more than 21 percent.
Posted by Veronica Silva Cusi, news correspondent
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Published: Saturday, October 8, 2011