No surprises expected in Q3 results

MUMBAI, INDIA: While the top tech companies are all set to show their performance card in the days ahead for the third quarter ended on December 30, 2010 of the fiscal 2010-11, market analysts predict a moderate growth for the IT sector.

According to Dipen Shah, Kodak Securities' senior vice president (PCT Research), the top four companies including TCS, Infosys, Wipro and HCL Technologies are expected to report sequential revenue growth of 2.4 per cent largely driven by volumes.

“Volumes for the top 4 companies are expected to rise by 5 to 8 per cent, which is impressive in the backdrop of a seasonally soft quarter. Average realizations are expected to remain stable. While cross-currency volatility should help, the appreciation of rupee against USD and GBP (pounds sterling) shall set off those gains,” Shah points out.

However, he adds, “EBIDTA margins are expected to be marginally lower as cost efficiencies and scale benefits nullify the impact of rupee appreciation.”

While the Standard Chartered Equity Research's latest report on India's IT services sector expect about 1.1-6.6 per cent (Q-o-Q) USD revenue growth.

“The cross-currency could have a positive revenue impact as the rupee appreciation could affect margins. As valuations shift to FYI, there will be focus on demand trends in discretionary-spend-led services, build-up in deal pipeline and hiring,” the report states.

In recent years, the Indian rupee has appreciated considerably and has remained a key factor in IT companies' overseas revenues and gains. However, the rupee is likely to continue to behave in the same fashion causing impact on the ended quarter.

“With the rupee/SUD exchange rate being almost at the 2QFY11 end levels, we expect minor fore losses/gains for the ended quarter. Also, the average rate is very close to the 2QFY11 end rate,” Shah explains.

Even Pankaj Kapoor, Standard Chartered Equity Research's analyst, agrees to rupee/USD exchange rate and its impact and further adds that the rupee has appreciated close to 4 per cent.

However, both the IT analysts don't see Europe crisis of any major concern for the Indian tech companies.

“Situation in Europe is still uncertain, though some signs of improvement are seen in the UK. We expect business growth from Europe to be sluggish but stable,” Shah says.

“Most of these tech companies are not having large business in the Europe region and hence they are not much exposed to the Euro crisis and it's not much significant,” stresses Kapoor.

However, he alerts the market should not expect any major surprises in Q3 but can expect volume recovery and consolidated growth.