The December quarter typically has fewer working days, thanks to the holiday season. But despite that, top-tier IT firms are likely to report good dollar term revenue numbers for the three months up to December 2009. The banking & financial services (BFSI) space appears to leading the uptick in demand, good news for companies such as Tata Consultancy Services (TCS) that have a relatively big exposure to the space.
Other sectors such as energy, retail, utilities and healthcare are also believed to be spending more on IT services, say industry watchers. As RBS points out, top-tier players are expected to have fared relatively better than their smaller competitors, given their broader service portfolio, low client concentration and lower pricing cuts on deals renegotiated over the six months up to September 2009.
As such, Infosys, for example, could post a revenue growth of 3%, but smaller firms may report a smaller increase. However, the 3% sequential appreciation of the rupee during the quarter would result in a muted rupee revenue growth, observes Morgan Stanley. And more important, operating profit margins (earnings before interest and tax as a share of revenues) are expected to be sequentially lower.
What will help revenues is better utilisation and also favourable cross-currency movements. While pricing pressures may have subsided, revenues are expected to be driven largely by a 4-6% quarter-on-quarter volume growth. Indeed, it?s possible that in some instances, realisations may have remained flat or even come off. And that could hit the operating margins of the IT firms by almost 1.5-2%. Analysts are of the opinionthat wage hikes at some firms such as HCL Tech, as also higher sales & marketing investments at others, may also dampen margins.
Analysts believe that both Infosys and Wipro may want to up their guidance for the March 2010 quarter in the wake of an improving environment. ?Infosys is also expected to upgrade its 2009-10 annual guidance by 1-2% for both revenues in dollar-terms and rupee terms. The management would continue to remain conservative and earnings would remain in an upgrade cycle for the next few quarters,? notes IDFC-SSKI Securities.
Mid-tier players like TechMahindra are expected to witness impact of higher wage costs, BT volume and price cuts during this quarter and report revenues of $239 million, a sequential growth of 0.9%. Patni Computer Systems is expected to post revenues in line with its guidance of $168-169 million. Mphasis is likely to report better numbers of about $242 million, up 4% sequentially due to the strong revenue visibility given by its HP-EDS parentage.
The industry is expected to give out flattish budgets for the coming year as compared with CY09. At the same time, the BSE IT index that appreciated 12.5% in the third quarter has outperformed the broader indices such as Sensex that grew 1.9%. Analysts in the industry expect a similar trend in tune with improvements in the IT budget environment.