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IT cos likely to post higher profits in Q2

Indian Software firms are expected to post higher profits in the just concluded quarter led by robust volumes, particularly in terms of the US dollar.

B. S. Srinivasalu Reddy   Mumbai     Last Updated: October 11, 2010  | 12:10 IST

Indian Software firms are expected to post higher profits in the just concluded quarter led by robust volumes, particularly in terms of the US dollar.

The rupee's movements against various currencies during the quarter are also expected to add up for the companies. Bangalore-based IT major Infosys Technologies, which is scheduled to announce its results next Thursday (October 14), could set the tone for other IT companies to follow.

"We expect a marginal uptick in pricing for some of the (IT) companies in this quarter.

Lower pressure on margins due to absence of salary increases, positive impact of cross currency and forex gains would drive their profitability," said Rohit Kumar Anand, PINC Research.

Analysts of ICICI Securities feel that top IT companies (Infosys, TCS, Wipro and HCL Technologies) could report five to seven per cent sequential volume growth led by improved demand environment and heightened activity in discretionary spend.

"IT services revenues in US dollar terms are expected to grow six per cent year- on- year (YoY or compared to the same quarter of the previous year), led in part by volumes and two to four per cent quarter- on- quarter (QoQ) depreciation of the US dollar (USD) against the euro, British pound (GBP) and Australian dollar (AUD)," said Abhishek Shindadkar, IT analyst of ICICI Securities.

Growth of rupee revenue is expected to top volume growth primarily due to the 1.8 per cent depreciation of the rupee against the USD. The USD has depreciated by 3.9 per cent, 1.5 per cent and 2.5 per cent against the GBP, Euro and AUD, respectively, during the quarter.

Strong Euro and GBP against the USD is set to affect the dollar- based revenue for most of the companies in the range of 0.6- 1 per cent.

Angel Broking expected the growth in USD- based revenue of top IT companies to grow in the range of 6.8- 7.8 per cent (QoQ or compared to the previous quarter) for Tier- I companies.

Thus, the USD- based revenue growth will revert to upward path, after two quarters of slowdown.

"Infosys to post expansion in its EBIT (earnings before interest and tax or operating margin) margins by 175 bps (100 basis points is equal to one per cent) QoQ as wage hikes are behind, the periodic visa cost will be lower, rupee depreciation to the tune of two per cent will cushion margins by 70 bps and higher offshore efforts will aid them," said Srishti Anand of Angel Broking.

In case of TCS, the effect of promotions would sweep away gains leaving it flat QoQ. Wipro is expected to post a 60 bps expansion QoQ in its IT services.

But Wipro is expected to post a 34 bps QoQ dip on consolidated basis due to strong growth in IT products, which is a thin margin business.

HCL Tech's margins are expected to decline by 239 bps QoQ due to the wage hikes of second quarter FY2011 and continued losses in the BPO business.

"Thus, second quarter FY2011 is expected to mixed on the EBIT margin front for Tier- I companies," Srishti added.

"Attrition levels had surged for all the Indian IT companies in the quarter ended June, 2010.

After a round of salary increases and promotions, we now expect the attrition to dip or remain stable," Anand of PINC said.

Geographically, the US and Asia- Pacific regions should lead transformational IT spends with Europe being the laggard, Shindadkar said.

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