With the fourth-quarter results of financial year 2008-09 around the corner, predictions estimate major IT companies to post a decline in revenue growth. While concerns about lower volume growth, pricing pressure, fewer deals and project cancellations are likely to echo in the result announcements of almost all IT majors, company specific issues will dominate the topline and bottomline growth of the Top Four Indian IT firms.
Insiders expect the recent acquisitions by companies such as HCL Technologies, which acquired UK-based SAP consulting firm Axon Plc; TCS (Citigroup Global Services) and Wipro (Citi Technology Services), will ensure that these companies post higher topline numbers. However, HCL?s margins and bottomline are expected to remain under pressure on account of the Axon acquisition.
While Axon had Ebitda margins of 16.7% in 2007 compared to 22.2% of HCL in FY2008, the former?s PAT margins are also lower at 9.9% vis-?-vis HCL?s 14.7%. ?We do not expect the Axon acquisition to turn EPS-accretive until FY2011,? says Harit Shah of Angel Broking in a report.
For Wipro, the third-largest Indian IT company, the acquisitions of Infocrossing and Citi Technology Services (Citos) might cap its margin expansion: ?The acquisitions are likely to remain a drag on Wipro?s operating and net margins, going forward. We expect that it would take another 12 months before the Infocrossing acquisition is EPS-accretive,? notes Ambit Capital in an earlier report.
Foreign exchange fluctuations, which have been a major cause of concern for the last two quarters are expected to have an adverse impact on the profit margins of companies in the fourth quarter too. The rupee has depreciated by 4.69% against the US dollar during the March quarter, compared to 27% on a year-on-year basis.
While this will help companies that are not heavily hedged against the dollar at lower levels, the appreciation of the dollar against other international currencies like euro and pound sterling would impact the dollar term revenues major IT companies.
HCL is expected to suffer the most this quarter. ?TCS will also be hit by the cross-current headwinds, however, its forex losses this quarter would be lesser than what it had in the last,? said an IT analyst with a brokerage firm. ?TCS? forex losses are likely to exceed Rs 200 crore for the third consecutive quarter, impacting profits,? observed a report by Bhavtosh Vajpayee and Nimish Joshi of CLSA. Infosys, on the other hand, would have less forex losses on account of their short-term hedging strategy.
Considering that only Infosys gives full-year guidance among the top players, its results would be keenly watched affair on April 15 as it would provide insights into the next year?s performance. While Q4 results are unanimously expected to be bad, by market analysts, there is a mixed view on whether the Q1 of FY2009-10 would be worse in terms of new deals, project cancellations and pricing pressure.
While a section of analysts expect things to look up from the mid 2009, many like Harit Shah of Angel Broking say that there is a good chance for next few quarters to perform worse than Q4 of FY2008-09. ?We expect growth to start picking up from 2HFY10, as clients begin to adopt offshoring to cut costs. As the freeze in technology spending begins to lift, we believe large players would start booking volume growth,? notes Motilal Oswal?s India strategy report, offering a different view.
As far as the Q4 is concerned, IT companies are expected to report sequential dollar revenues declines owing to stressed volumes and declining realisations. ?This is the second consecutive quarter where the sector will see dollar revenue de-growth,? points out Motilal Oswal report. ?There have been only a few new deals here and there this quarter,? says Kapil Dev Singh, country head of the research firm IDC, adding that the next few months could be even more challenging.
While S Ramadorai, CEO of India?s largest IT company, TCS has already hinted that the company is facing pricing pressures to the tune of 4%-15%, analysts are expecting the pricing decline to intensify. ?We expect a 1-3% quarter-on-quarter decline in pricing for IT companies this quarter and going forward, expect pricing pressure to intensify, leading to margin pressures,? says a Q4 review report of Angel Broking.
Companies are also expected to post lower utilisation rates due to project downsizing, which could affect their margins. There have been several vendor consolidation exercises in the industry, which has led to an increased competition from international majors like IBM and Accenture. The fact that many of fraud-hit Satyam?s clients are reported to have switched sides and have entrusted other Indian IT vendors is the only blessing in disguise for firms. However, the benefits of such deals would not reflect immediately on their balance sheets.