IT firms to report rise in demand; eye on rupee

MUMBAI, INDIA: A pick-up in global technology spending in 2010 will bolster the toplines of Indian outsourcers that get most of their revenue from exports, but a strengthening rupee and rising wages pose risks to profit margins.

Leading software services firms such as Tata Consultancy Services, Infosys Technologies and Wipro that manage complex computer networks and maintain technology operations for many of the Fortune 500 companies have revived hiring, signalling improving demand.

The focus of the quarterly earnings that start with trend-setter Infosys on Tuesday will be the growth forecast for 2010/11 that began on April 1, pricing trends and the IT budgets of their foreign clients.

"Fundamentally, things are improving. Pricing environment has stabilised, hiring is picking up and there's better visibility about volume growth," said Mahesh Patil, fund manager at Birla Sun Life Asset Management, which manages about $14 billion, including shares of TCS, Infosys and Wipro.

Infosys, which counts Goldman Sachs, BT Group and BP Plc among its clients, said in January it expected dollar revenue for 2009/10 to rise 1.8-2.0 per cent, reversing its previous forecast for a first-ever fall.

Most brokerages expect the Nasdaq-listed Infosys to project 12-15 per cent growth in dollar revenue in 2010/11.

Infosys, whose sprawling campuses in India have pizza and Subway outlets, golf courses and fitness centres for its tens of thousands of employees, is seeing a rise in outsourcing deal flows, its chief executive had said last month.

'Joker in the pack'

The strengthening rupee, which rose 3.6 per cent against the dollar in the March quarter after a 4.7 per cent gain in 2009, higher wages and competition from global firms such as IBM, Accenture and Hewlett-Packard are key risks for the nearly $60 billion sector.

A Reuters poll last month showed the rupee climbing to 43.53 against the dollar by March 2011, up 3.1 per cent on year. Indian services firms get more than half their revenue from the United States.

"The rupee could be a joker in the pack in the short to medium term," said Birla's Patil.

Wages at Indian outsourcers had been rising by 10-15 per cent annually before the global slowdown, as they struggled to keep staff from being poached by rivals such as IBM and Accenture who hire by the thousands in India.

Firms such as Infosys, who had frozen annual wage hikes in April last year due to the business downturn, are expected to raise the salaries for all its staff this month, putting pressure on their margins.

Brokerage Macquarie said in a report that currency and wage inflation would be key headwinds for margins in 2010/11.

TCS shares have risen 8 per cent so far this year and those of Infosys are up 4 per cent, compared with the 4 per cent rise for the IT sector index. Despite the relatively modest stock gains, valuations are seen as somewhat rich.

Infosys trades at 24 times one-year forward earnings and TCS as well as Wipro at 23 times each, compared with the 11 times for IBM and 16 times for Accenture, according to Thomson Reuters I/B/E/S.

"Valuations of the software stocks have run ahead of the growth expectations and if there isn't any major positive surprise in the earnings, I don't think these stocks will go up sharply from these levels," said Naresh Garg, a fund manager with Sahara Mutual Fund.

NOTE: Estimates for Tata Consultancy are in U.S. GAAP and Wipro in IFRS. Forecasts for Infosys are in Indian GAAP.

Poll contributors: Citigroup, Angel Securities, PINC Research, IDFC SSKI, Kotak Securities, IIFL, ICICI Securities, Sharekhan, JP Morgan, Centrum, Morgan Stanley, Emkay, Bank of America Merrill Lynch, UBS, Edelweiss, Daiwa, and Macquarie.