India 'IT' shining

Rosemary Arackaparambil

MUMBAI: Indian software firms are set to post strong quarterly results thanks to increased outsourcing by their customers and stable billing rates, but fatter wage bills cloud their outlook, analysts said.

Profits in April-June for sector leaders such as Infosys Technologies and Wipro, which both topped $1 billion in revenue last year, are expected to rise by between 25 and 77 percent from a year ago, according to Reuters polls.

MphasiS BFL kicks off the reporting season with its first-quarter earnings on Friday.

Companies have said downward pressure on billing rates has eased, and analysts expect some to report price increases.

"There are two positives -- the decline in billing rates is reversing and the rupee is depreciating," said R. Ravi, analyst with IDBI Capital Markets. "But wage pressures will continue as a result of which margins will not expand much."

Most firms pushed up wages, by 15-20 percent, from April.

"There's a lot of poaching among Indian companies and also by multinationals," said Arun Kejriwal, director of Mumbai-based equity research firm KRIS.

Global giants such as IBM and Accenture have built large employee pools in India, putting pressure on Indian companies competing for the talent.

Sandeep Shenoy, strategist at Pioneer Intermediaries, said there was pressure to raise wages for middle- and higher-level jobs, where experience was in demand, but entry-level wages were falling as there was no shortage of applicants.

Bangalore-based Infosys, India's top listed software services exporter, received a million applications for the 10,000 jobs it advertised in the year to March. Wipro hired over 9,000 people.

Companies are expected to keep up their hiring rates as business flow increases with global IT spending budgets improving along with a recovering U.S. economy.

India's software and allied service exports grew 30.5 percent to $12.5 billion in the year to March, and the industry association expects 30-32 percent growth in the current year.

"Business traction is certainly picking up and it will gain momentum in the current quarter going by the trend of recruitment in the past four quarters," said Pioneer's Shenoy.

"Quarterly volume growth even in the worst of times was 2.5 to 3.5 percent, some of the larger companies may even show 10 percent quarterly growth now," he said.

GUIDANCE WATCH

Analysts said the rupee's uncertain outlook would probably deter firms from raising their earnings guidance for the year.

"I don't think companies will revise their earnings guidance for the year upwards ... because of the rupee-dollar swing. Two quarters ago, they didn't hedge enough and had their fingers burned. Now they've over-hedged," Shenoy said.

The Indian rupee gained 5.24 percent last year, but has lost 5 percent since hitting a 51-month low on April 7.

Some analysts said many companies had hedged export receipts in March, expecting the rupee to continue gaining. The lower rupee was now likely to have wiped out any forex gains.

The Bombay Stock Exchange's IT index has gained 21 percent since the market crashed on May 17 amid investor fright at a change of government.

The top few companies are trading at 15-27 times forecast earnings, but many research houses remain overweight on the sector, citing an improving outlook.