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Slowdown hits IT companies' profits

By Leslie D'Monte & Shivani Shinde in Mumbai
October 23, 2008 12:03 IST
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The unprecedented banking and financial crisis in the US is telling on the revenues and profitability of Indian IT-BPO firms, and will continue to do so during the October-December 2008 quarter which has fewer working days.

The managements of all the top Indian IT firms have categorically indicated that there's "uncertainty" in the environment.

The July-September 2008 (second quarter for most Indian IT firms) results reveal the fallout. For instance, India's largest IT services provider, Tata Consultancy Services (TCS), recorded a net profit of Rs 1,271 crore (Rs 12.71 billion) -- up only 1.5 per cent as compared to corresponding period a year ago.

Sequentially (compared to the trailing quarter), too, its net profit was up 1.5 per cent. In US dollar terms, it recorded a marginal 1.2 per cent rise in net profit. The company does not provide guidance.

Earlier, Satyam too reduced its FY09 revenue guidance in US dollar terms. It also truncated its targeted headcount addition over FY09 to around 10,000 (vs 15,000 earlier). The management appeared to be braced for a decline in ERP licence sales but confident of margin expansion (around 100 bps) in future.

HCL Technologies' results, too, were below estimates. Its dollar revenues were flat sequentially (QoQ) and margins were down by 100 bps. Client addition at 29 was flat sequentially. Wipro's flagship IT business division grew 36 per cent to Rs 4,750 crore (Rs 47.50 billion) but in dollar terms, this business grew by 29 per cent YoY and a sequential growth of 4 per cent only.

However, the major concern for Wipro is the guidance for its IT services business which, it says, will grow by just under 1 per cent for the third quarter. Azim Premji, Chairman, Wipro, says: "The global economic environment has deteriorated significantly over the past couple of months, and our outlook is cautious in the near term given the extent of strain on the global economy."

Analysts point out to the lower client addition and higher utilisation rates in the quarter under review. The client numbers were expected to be low as the US market is in a flux but across the firms the utilisation has gone up considerably.

A few reasons could be lower attrition rate, improving utilisation on the back of less hiring and using internal resources in a better way. Some brokerage firms have even downgraded the sector and recommended 'no buy' even for the large caps.

The reason being, said an analyst requesting anonymity, is that unlike what was said in the fourth quarter 2008 and the first quarter of FY09, the project delays will stretch to next year. Clients will be interested in solving their internal issues first so IT budget spent will be slow.

The short- and mid-term bearish sentiment stems from the fact that the US and UK account for almost 80 per cent of the revenues of all Indian IT firms. The crisis is spilling over to the UK, too, where Indian IT firms were finding succour by derisking geographically.

Moreover, the banking, financial services and insurance (BFSI) vertical -- which has been affected the most by the sub-prime crisis -- accounts for slightly over 40 per cent of the total revenues of the software sector. Uncertainty in the BFSI will result in renegotiation of pricing, and further lag in deal-making, note analysts.

Analysts note that the negative segment has hurt other emerging verticals like retail (which accounts for around 8 per cent of revenues) spending too, and manufacturing (around 15 per cent) which is being affected in pockets (for instance, automobiles).

Besides, the benefits of a falling rupee was largely limited since most companies had over-hedged their position (most of it as forward contracts). HCL Tech had a mark-to-market (MTM) loss of Rs 97.4 crore (Rs 974 million); Wipro had a forex loss of Rs 28 crore (Rs 280 million) for the quarter. The company has hedged $2.1 billion for the future.

Infosys had hedged around $932 million for the whole year, and reported a MTM loss of $28 million (around Rs 135 crore).

Since the IT Industry is shaped by global economic forces, the Indian software and BPO industry will turn into a cyclical growth industry. Forecasting the growth trajectory in this context will become all the more fraught with risk in the future, said Alok Shende, Principal Analyst, Accendia Consulting.

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Leslie D'Monte & Shivani Shinde in Mumbai
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