The Hindu Business Line : Sliding rupee to support Q1 earnings of cos

Hyderabad, July 6 Technology sector earnings could well show a positive impact of the rupee depreciation by about 7 per cent, during the first quarter of financial year 2008-2009, and also benefit from volume growth being on projected lines.

For the quarter ending June 2008, companies could give a clearer picture of business progress, particularly in the backdrop of reports about a general economic slowdown.

According to a research report of brokerage and analyst firm Sharekhan, “the top line of frontline technology stocks is expected to grow in the range of 6.5 per cent - 11.1 per cent sequentially in rupee terms for the first quarter of financial year 2009. (This) growth is primarily driven by volume growth of 1-2 per cent, boosted by 7 per cent depreciation in the rupee against the dollar during the quarter."

However, in dollar terms, the sequential growth may remain muted for the quarter.

During the first quarter ended June 30, 2008, tech stocks outperformed the benchmark indices driven by factors such as depreciating rupee and extension of tax sops under Section 10A/B for one more year.

Given this backdrop, it is likely that tech firms such as Infosys may revise revenue guidance upward. This may be the case with Satyam Computer, which had earlier come up with a conservative outlook for the year.

TCS, in its annual report for 2007-2008, has referred to trimming of costs by enterprises to remain competitive, which has resulted in increased outsourcing.

Cautious approach

IT firms generally tend to be cautious about the volatility in rupee as it could work both ways. In a recent interaction with the Chief Financial Officer of Satyam, Mr. V. Srinivas, said “a one-per cent depreciation in rupee has a positive impact of 30 basis points on margins.”

The unpredictability of the rupee is adding to the industry’s concerns. Mr Som Mittal, President, National Association of Software and Services Companies, the industry’s apex body, told Business Line recently, “We prefer the rupee to be stable, wherever it is against the dollar.”

While there have been reports on pricing pressures lately, chief financial officers of top firms have said that though the business environment is a lot tougher now, there has not been much impact on the overall billing rates.

In fact, in some of the deals which have come up for renewal, they have managed higher rates.

Projects gratis

Interestingly, it is learnt that those very companies which have managed higher rates in some projects, are willing to do work for free in other projects. Asked if this was true, Mr Mittal said, “It could be the case. After all, in business you have to look at the long term,” referring to the fact that doing projects gratis for clients now could mean bigger projects later.

Generally, due to higher costs, including wage hikes (however tempered), there is likely to be pressure on operating margins.

According to a CIO survey, IT spending is expected to remain stronger than expected in 2008. The survey indicated that IT spend is to grow at 8 per cent in the second half this year compared to 3 per cent the same time last year.

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