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IT industry expected to post muted Q1 results on economic uncertainty

Contrary to earlier expectations that the fall in rupee would bring in a windfall for the sector, the information technology will probably post a muted growth in both net profit and revenues amid global economic gloom.

Rajesh Kurup | July 7, 2012 | Updated 11:18 IST

Belying expectations of a good quarter, the information technology (IT) sector will probably post a muted Q1 growth in both net profit and revenues due to the global economic gloom and the depreciating rupee . This is contrary to earlier expectations that the fall in rupee would bring in a windfall for the sector. Separately, IT bellwether Infosys, which will kick-start the earnings season on June 12, is expected to cut guidance for the full year.

"There are no high expectations from the sector. The growth will be muted and the fall in rupee is also unlikely to benefit these firms as most of them would have hedged rupee against foreign currencies especially the dollar and the euro," Alex Mathews, head (research), Geojit BNP Paribas Financials, told Mail Today.

According to Jagannadham Thunuguntla, head (research), SMC Global Securities Ltd, "The major reason is the current global situation. Equally important is the currency fluctuation (the fall in rupee) and the impact will vary from company to company depending on their hedging strategies."

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IT firms were expecting a windfall due to the depreciation in rupee-which dipped almost eight per cent during the quarter-with a majority of them expecting to post better-than-expected first quarter results. However, uncertain economic climate across the world, especially in Europe, has spoiled the sector's party.

Usually, IT companies hike salaries in the first quarter. This year too, most firms, barring Infosys, had increased salaries to retain talent. The country's largest software exporter Tata Consultancy Services (TCS), Wipro Technologies, Hexaware, KPIT Cummins and MPhasis among others had hiked salaries. However, hikes will be less this year.

"Yes, it will be subdued in terms of dollar revenues but not to a great extent in rupee terms. However, compared with traditional first-quarter earnings, this quarter could be subdued as crosscurrency issues are playing the spoilsport," Ankita Somani, sector analyst, Angel Broking, said.

Companies were planning to dole out an average of 11.9-per cent salary hike this year compared to 12.6 per cent last year, according to a survey by human resources consulting firm Aon Hewitt. India will be the highest in the Asia-Pacific region and rank among the top five nations in the world in terms of salary hike, according to Aon Hewitt. "Amongst tier-I companies, we expect a 0.2-2.9 per cent quarter-on-quarter growth with TCS at the upper end and Infosys at the lower end," Dhananjay Sinha, co-head, (institutional research economist and strategist), Emkay Global, said.

However, most analysts expect Infosys to cut revenue guidance on cross-currency issues. "We expect Infosys to downgrade its dollar revenue growth guidance for FY'13 to 6.8-8.8 per cent year-onyear (eight-10 per cent YoY earlier) on adverse cross-currency movements as it will have to take lower end-of-period rates of the British pound, euro and Australian dollar against the US dollar for conversion," analyst firm Nirmal Bang said in a note.

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