India IT firms profit up on outsourcing boom

Narayanan Madhavan

BANGALORE: India's top software services companies, led by Tata Consultancy and Infosys Technologies, are set to report their quarterly profits have risen by about a third from a year ago, as they ride an outsourcing boom.

Analysts say the bigger software companies may even fare better in the second half of 2005, while smaller firms may still struggle to manage manpower and costs.

"TCS, Infosys, Wipro will all do well," said Sandeep Shenoy, a strategist at Pioneer Intermediaries, adding that their business will gain traction as the manpower additions over the past quarters pay off.

"Smaller companies will be beaten down as the cost of carrying manpower will eat into their margins," he said.

Despite a backdrop of a rising rupee, inflationary salary levels and a moderate uncertainty on earning expectations, Indian software companies were getting more businesses, Parul Inamdar, analyst at brokerage Prabhudas Liladhar, said.

But wage increases from April, an erosion of treasury income and issues unique to each company could keep earnings growth flat against the previous quarter, analysts said. Profit margins are expected to hold steady as new deals come in at higher prices.

The fiscal first-quarter earnings season is set to kick off on Monday with mid-sized MphasiS BFL Ltd., followed the next day by Infosys Technologies Ltd., India's second-largest software exporter.

Infosys is expected to post a 39 percent jump in net profit to 5.38 billion rupees in the first quarter ended June from a year earlier, a Reuters poll of 10 analysts showed.

But MphasiS is likely to report a 12 percent year-on-year fall in profit despite a jump in revenue, which an analyst blamed on "consolidation pangs" related to two acquisitions that eroded treasury income.

STRONG GROWTH

The industry expects India's $17.2 billion software and business service exports to grow 30-32 percent in the year to March 2006, powered by its low-cost, English-speaking workers.

Chetan Shah, analyst at Fortis Securities, said new clients were coming in at 10 percent higher rates.

Global rivals such as Accenture and IBM are poaching staff from Indian firms, but Shah said companies like Infosys and Wipro Ltd., India's third-biggest software firm, were training low-cost freshers in large numbers.

India's top software exporter, Tata Consultancy Services Ltd., is likely to show a 29 percent growth from a year ago and 40 percent from the previous quarter to 6.48 billion rupees after it had posted disappointing earnings in the last quarter.

Shekhar Singh of ICICI Securities (I-Sec) said in a report that volatility was to be expected from TCS because it had a higher share of contracts based on fixed prices of varying durations rather than billed hours.

TCS will report on July 15.

INFOSYS BOUNCES BACK

Infosys spooked markets in April with a flat sequential growth forecast as demand slowed from some clients busy complying with new U.S. accounting rules. Analysts said this was a one-off event, and Infosys could spring a positive surprise.

Nasdaq-listed Infosys saw a successful conversion of a part of its domestic stock into American Depositary Shares in May to help its shareholders reap the premium it commands in the United States.

The United States is India's prime market, accounting for more than 60 percent of exports. A sharp rise in U.S. visa charges for work permits may also have an impact on margins of Indian software companies, analysts said.

Wipro, Infosys's Bangalore rival, may have muted quarter-on-quarter growth due to a seasonal slump in its hardware business. The loss of its U.S. based vice-chairman Vivek Paul this month to a private equity fund may not tell on earnings.

"Wipro is a breeding ground for technology executives," said Fortis's Shah. "That has no impact on business. In case Paul had gone to a competitor, it would have an effect."

Singh said Satyam, India's No. 4 software exporter, was likely to disappoint on account of higher tax and lower earnings from non-mainstream business on the quarter. Satyam is set to unveil results on July 21 and Wipro on the following day.