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Sliding rupee to support Q1 earnings of firms
By siliconindia
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Wednesday, 09 July 2008, 01:32 IST
Hyderabad: The IT sector is expecting a good earning result during the first quarter of financial year 2008-2009, given the depreciation of rupee by 7 percent. The sector will also benefit from volume growth being on projected lines, reported Business Line.
According to a research report by brokerage and analyst firm Sharekhan, "the top line of frontline technology stocks is expected to grow in the range of 6.5 percent to 11.1 percent sequentially in rupee terms for the first quarter of financial year 2009. Primarily driven by volume growth of 1-2 percent, this growth is also boosted by 7 percent depreciation in the rupee against the dollar during the quarter." However, the sequential growth in dollar terms may remain muted for the quarter.
Apart from the depreciating rupee, an extension of tax sops under Section 10A/B for one more year during the first quarter also helped tech stocks outperform the benchmark indices.
Given this backdrop, it is likely that tech firms such as Infosys may revise revenue guidance upward. This may be the case with Satyam Computer, which had earlier come up with a conservative outlook for the year. TCS, in its annual report for 2007-2008, has referred to trimming of costs by enterprises to remain competitive, which has resulted in increased outsourcing.
IT firms generally tend to be cautious about the volatility in rupee as it could work both ways. In a recent interaction with the Chief Financial Officer of Satyam, V. Srinivas, said "a one-percent depreciation in rupee has a positive impact of 30 basis points on margins."
The volatility of the rupee is adding to the worries of the industry. Som Mittal, President, National Association of Software and Services Companies, the industry's apex body, recently said, "We prefer the rupee to be stable, wherever it is against the dollar."
While there have been reports on pricing pressures lately, chief financial officers of top firms have said that though the business environment is a lot tougher now, there has not been much impact on the overall billing rates. In fact, in some of the deals which have come up for renewal, they have managed higher rates.
On the news that those very companies which have managed higher rates in some projects, are willing to do work for free in other projects, Mittal said, "It could be the case. After all, in business you have to look at the long term," referring to the fact that doing projects gratis for clients now could mean bigger projects later.
Generally, due to higher costs, including wage hikes (however tempered), there is likely to be pressure on operating margins. According to a CIO survey, IT spending is expected to remain stronger than expected in 2008. The survey indicated that IT spend is to grow at eight percent in the second half this year compared to three percent the same time last year.
