Tax, wages to dent mid-cap IT profit qtr

Jul 15 2011, 11:08 IST
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SummaryMid-cap IT companies in India are likely to see a modest revenue growth in April-June quarter.

MIDCAP IT/PREVIEW: Mid-cap IT companies in India are likely to see a modest revenue growth in April-June on stable demand, but most would see profits and margins squeezed by wage hikes and higher taxes in short they won't pull off a TCS.

* WHAT: Mid-cap IT companies' April-June earnings

* WHEN: Starting July 20

* Demand steady, but wages squeeze margins, profits

* Tax holiday withdrawal hurts

The June quarter is typically stable for software services firms after a seasonally weak Jan-March, when clients finalise budgets for the next fiscal year, leading to a spurt in spending in the next two quarters.

Tier-two IT companies are expected to report 2-6 percent volume growth, brokerage Prabhudas Lilladher said in a report. We expect margin of tier-two Indian IT services companies to witness sharp erosion.

Companies could see margins slipping sequentially as most raised wages by an average of 12 percent for offshore employees and about 2.5-3 percent for onshore employees.

Margins would drop 50-200 basis points on a sequential basis, said Angel Broking analyst Srishti Anand.

For mid-tier companies across the board, we are seeing selling, general and administrative costs as a huge margin lever, so year-on-year if you go to see, margin movement for mid-tier companies would be upward.

A spurt in tax rates due to expiry of the Software Technology Parks of India (STPI) scheme will also hurt margins and crimp profits compared with a year ago.

Small and mid-cap IT firms would especially see a dent as many are yet to migrate to special economic zones to continue enjoying some sort of tax benefits.

Tax rates would rise to 25-27 percent from 12-16 percent earlier and the impact on profit margins would be huge, said Vimal Gohil, analyst, Asit C. Mehta Investment Intermediates.

The increase in tax rates would have an additional 6-7 percent dent on profits, said Gohil.

STPI scheme was started in 1991 to boost software exports. Among other benefits, it provided a 10-year income tax exemption for units situated in software technology parks.

A poll of 16 brokerages estimates profits of Patni Computer Systems, MphasiS and Infotech Enterprises to continue to decline in double digits, while Mastek would stay in the red.

HCL Technologies and MindTree's profits are likely to rise in double digits, while profits at KPIT Cummins and Rolta India would inch up slightly.

Hexaware Technologies will, once again, see a more than three-fold rise, helped by strong enterprise resource planning business growth.

Amongst mid-tier companies,

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