Better Re realisation, volume growth to cushion IT margins

Better-than-expected rupee realisation in the IT sector will cushion the impact of key headwinds like wage hikes and the Euro?s tumble, according to various research and brokerage reports reviewed by FE for the April-June period.

Higher business volumes and improving utilisation of resources are also likely to offset the impact on margins, the reports said.

The EBITDA margins of the top-three IT players are seen to contract in the 90-190 basis points range, far better than what some of the firms had guided at the end of the fourth quarter of last fiscal.

Infosys expected EBITDA margins to decline 250 basis points. However, brokerage firm Motilal Oswal expects the firm’s margins to dip only 90 basis points, largely due to wage inflation, which stood at 13% offshore and 2-3% on site.

?Margin declines will be lower than guided due to better rupee realisations ($/INR average of 46 v/s guidance of 44.5),? the Motilal Oswal report said. The report also predicted the revenue growth to touch 5.3% QoQ, as against a guided growth rate of 2.6-3.4%. Wage inflation at TCS (10% offshore, 2-4% in developed markets and 2-10% in emerging markets), together with cross-currency movements can lead to moderation of EBITDA margins by 130 basis points, analysts said. Wipro?s decline is seen at 130 basis points as well, due to a residual impact of one month of wage inflation, cross-currency movement and a growth skew towards emerging markets and services such as Infrastructure Management Services (IMS) and BPO.

Most top-tier firms have been able to improve utilisation during the last quarter as their bench strength shrunk drastically as business volumes picked up.

A research note from Sharekhan said that Q1 of FY11 is expected to be another quarter of strong volume growth for the front-line IT companies as the demand environment remains buoyant in the USA and the emerging economies and on account of their limited exposure to Portugal, Italy, Ireland, Greece and Spain (PIIGS) economies.

?Companies are expected to employ levers such as improvement in utilization levels to counter the impact of rupee appreciation on their profitability,? said Vaibhav Agrawal, vice-president, (Research), Angel Broking.

The brokerage expects EBITDA margins of top-tier IT companies to register 20-190 bps sequential decline on account of strong hiring and salary hikes.