Analysts and investors are bracing for disappointing first quarter results of IT companies. This comes amid concerns about the steep appreciation of the rupee against all major currencies (unlike the previous quarter, when it was gaining only against the dollar), the incremental cost of visa charges, recruitment of non-billable trainee engineers and annual salary hikes.
A cross-section of analysts polled by FE estimated that first quarter results for financial year 2007-08 will see an impact on margins by 300-350 basis points on a sequential basis (March quarter vs June quarter), and companies giving wage hikes will take a hit of 350-400 basis points.
According to online share trading company Sharekhan, the cumulative earnings of five leading companies?TCS, Infosys, Wipro, Satyam and HCL Technologies?are estimated to show an over 10% sequential decline for the first quarter. A report by broking house CLSA says, ?Contrary to last year, when currency provided a helpful tailwind into the wage hike quarters, 2007 is a double whammy as firms head into wage hikes with a currency that has strengthened 6.5% QoQ.?
Similarly, Kotak Securities research projects that IT companies will report flat sequential growth in revenues
and marginally lower net profits in the quarter. ?The 5-7% expected volume growth and marginal increase in average realisation are likely to be set off by the 6.5% appreciation in the rupee against the dollar in the quarter,? it said.
Analysts are divided over whether companies will revise downward their earnings guidance on rupee terms, but are confident that the frontline IT firms will make an upward revision of guidance in dollar terms. ?The strong volume growth and good business momentum may help IT companies stick to their guidance. But some companies might have to go for a downward revision in rupee terms,? says Harit Shah of Angel Broking. Guidance from companies will decide the near-term movement of IT stocks.
Analysts believe Cognizant and Satyam could post strong revenue growth. Margin moves are not comparable among companies as there is a difference in their accounting treatment of forex gains and currency hedges. While companies like Infosys, Satyam, and HCL show the gains and losses in other income, others take the impact to the EBIT line.
