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India software profits seen flat, recovery elusive

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CIOL Bureau
New Update

Anshuman Daga and Rosemary Arackaparambil






BANGALORE/MUMBAI: India's top software companies are expected to show the scars
of fierce competition for clients and pressure on billing rates when they

release their April-June results.

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"We feel that volume growth will be the significant feature of this

quarter but at the same time, price weakness will continue which will put

pressure on profitability," said Mahesh Vaze, analyst at Inquire Indian

Equity Research.

In the last few quarters, software firms have struggled to maintain growth

after doubling profits annually in prior years. But now a pickup in hiring,

resumption in client visits after a month of uncertainty triggered by

Indo-Pakistan border tension and a big push into back-office services underlines

optimism about sales growth accelerating later this year.






In the just ended quarter, net profits at Infosys Technologies, the top listed
software exporter, is estimated to have risen just over one per cent from the

preceding quarter, according to the median forecast in a Reuters poll of 10

brokerages.

At Wipro, Satyam Computer Services and HCL Technologies, profits are seen

flat to 10 per cent lower. Smaller firm Digital GlobalSoft is expected to see an

almost two per cent rise. Infosys reports results on Wednesday and Wipro on July

19.

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Shares under pressure



India's software sector, which counts about 200 Fortune 500 firms among its

clients, bucked a global slowdown last year as global firms turned to

outsourcing to cut costs. India's software services export revenue rose 29 per cent

to $7.5 billion last year, accounting for 16 per cent of the country's overall

exports.






But fund managers' enthusiasm for Indian IT stocks has withered in the past six
months due to a succession of incidents which aroused concern over peace and

security in India. These events include last December's attack on the Indian

parliament, communal rioting in February and March in Gujarat, and fighting in

Kashmir which brought India and Pakistan to the brink of war in late May.

Bombay's information technology index has fallen eight per cent in 2002 compared

to a three per cent rise in the benchmark 30-share index.

Infosys' shares have lost 16 per cent, Wipro's 12.5 per cent and HCL

Technologies' nine per cent. Satyam Computer's shares however rose six per cent

while Digital's shares have surged 39 per cent as its sales soared 80 per cent

last year, nearly three times the industry average.

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Back to hiring



After a year in which software firms slashed salaries, froze headcount and
resorted to low-key layoffs, companies are resuming hiring as they eye a slow

recovery and expand into back-office services to spur stagnant sales.

"Although we expect little from June 2002 results, we expect capacity

utilisation and recruitment to exhibit an improving sequential quarter trend,

thereby setting the tone for improvement in subsequent quarters," Kotak

Securities and Goldman Sachs said in an earnings preview last week.






Many software firms are rushing to offer IT-enabled services.Business process
outsourcing (BPO) is the hottest service sector and Indian companies aim to

build on the country's proven software skills to provide an array of back-office

services, delivered remotely through high-speed telecom links.

Infosys has forecast first-quarter sales to rise 0.6-2.0 per cent, while

Wipro expected its global IT revenue to rise two per cent. For the year to March

2003, though, Infosys expects revenue to increase 17 to 20 per cent and Satyam

has forecast a 18 to 20 per cent rise, indicating higher growth in the second

half.

(C) Reuters Limited.

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