Software firms' Q2 results may be grim

Rosemary Arackaparambil

BOMBAY: Software companies in India are expected to report their weakest

earnings growth ever in the July-September quarter - and the outlook ahead is

even worse, analysts said.

At the five leading companies, profits are likely to have barely risen - or

even declined - from the previous quarter, a Reuters poll of 14 brokerages

released on Tuesday showed. The September 11 attacks on the United States, the

main market for India's big software service companies, had little impact, but

will influence the numbers over the next two quarters, analysts warned.

"Most companies may meet estimates for the (July-September) second

quarter," said Birla Sun Life Securities' Amit Khurana. "I expect they

will post some 3-4 per cent sequential growth, but people are more concerned

about the next few quarters."

CLSA Emerging Markets said in a recent report: "As most projects

typically take two to three quarters to ramp up to significant levels, current

sentiment could impact January-March quarter earnings."

Of India's five largest software service companies, Infosys Technologies is

expected to report just 1.88 per cent quarter-on-quarter profit growth and

Satyam Computer Services 1.22 per cent, according to the median of forecasts in

the Reuters poll. Sales are expected to have stagnated.

Wipro , NIIT and HCL Technologies are seen posting profit declines on the

quarter. Most companies indicated in announcing results last quarter that

billing rates were under pressure and client decision-making on IT-related

spending including new software development was slowing as they moved to cut

costs.

"New client additions will have been much lower than the previous

quarter and most of the business will have come from existing clients,"

said Khandwala Securities' Gurunath Mudlapur. Indian software firms had hoped to

counter the US slowdown in IT spending by touting the cost advantage of service

work performed in India compared to at client sites overseas. But with the start

of US-led retaliatory attacks on Afghanistan, new clients may be scared of

outsourcing to India because of its proximity to the conflict, analysts say.

Billing rates

Mudlapur estimated operating margins at mid-and small-cap companies in

particular would be lower as their billing rates would have been under more

pressure. However, Chennai-based Polaris Software said last week its billing

rates were steady last quarter. But it admitted decision cycles were getting

longer, taking 4.5 to nine months.

The earnings season kicks off this week with Infosys Technologies reporting

on Wednesday. It said after the September attacks it saw no reason to change a

forecast of revenue of Rs 6.25 billion-6.4 billion ($130 million-$133 million)

for the second quarter. Wipro announces results on October 18. Result dates of

the other leading firms are yet to be announced.

(C) Reuters Limited 2001.