IT cos expected to post sequential growth in Q2

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Bangalore: The worst seems to be over for the Indian IT industry as analysts predict a return of sequential growth in the second quarter of fiscal 2010 helped by improvement in business sentiments and favourable cross currency movements.

Also, the faster-than-expected turnaround could prompt Infosys Technologies to upgrade its fiscal 2010 revenue forecast to a flattish year-on-year growth, compared with the company’s earlier negative projections, analysts said. Infosys, which will announce its numbers on Friday, would beat its own projections for the September quarter, they said.

Positive commentary:

The recent positive commentary from the managements of top tier vendors coupled with a robust deal flows throughout the September quarter has lifted sentiments in the sector. In the previous two quarters, the industry had for the first time since 2001 witnessed a sequential negative growth, reeling under the impact of the global economic crisis that caused volumes to drop and induced pricing pressures.

Analysts said client decision making was turning orderly with improvement across verticals (especially BFSI and Telecom). Signs of recovery, including volume based utilisation improvement, stable pricing and abatement of leakages at key clients, are also visible.

“We believe pick-up in discretionary demand, faster rebound in BFSI and telecom and contribution from new business channels could lead to upgrades,” brokerage firm Motilal Oswal said in a note to clients.

The rupee has remained largely flat against the US dollar during the September quarter, as a result of which the rupee-term growth would be largely in line with the dollar-term revenue growth during the quarter.

A BL poll of five brokerages reveal that Infosys would post an average revenue Rs 5,576 crore for the quarter ahead of its guidance of Rs 5,318 crore to Rs 5,413 crore. Net profits were expected to be marginally lower at Rs 1,523 crore from Rs 1,527 crore in the June quarter.

TCS is expected to post a revenue of Rs 7,312 crore ahead of its June quarter’s Rs 7,207 crore. Profits could increase marginally to Rs 1,523 crore due to higher tax rate as against Rs 1,520 crore in the previous quarter.

Wipro’s consolidated revenues were expected to grow to Rs 6,621 crore as against Rs 6,318 crore in the previous quarter, while net profits were likely to decline marginally to Rs 1,065 crore.

Analysts also expect an improvement in utilisation for the September quarter. “This coupled with favourable cross currency movement (a positive impact of 1.5-2 per cent on dollar-term revenues), we expect front-line IT companies to easily exceed their Q2 dollar-term revenue guidance,” an analyst at Sharekhan said.

Operating margins:

Operating margins of the top tier companies will remain resilient with a year-on-year improvements of 50-120 basis points. Headcount cuts and hiring postponement could provide further upsides to margins, analysts added.

Companies such as Infosys and Wipro are giving out pay hikes and promotions to their employees, which is a sign of improved business prospects. Infosys, which had not raised salaries in April, is considering a hike in October, while Wipro has also given out hikes, albeit more selectively, to top performers, said an analyst at Angel Broking.

The ongoing vendor consolidation exercises have also benefited companies like TCS, Infosys and Wipro, helping them not only retain the customer, but also giving them the scope to increase their engagement with the clients.

During the quarter, TCS, Infosys and Wipro were retained by energy giant BP, which in a major exercise cut its vendors from as many as 40 to just five.