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Indian IT: Raising a red flag - Views on News from Equitymaster
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Indian IT: Raising a red flag
Feb 11, 2009

Indian IT companies announced their December quarter results amidst economic slowdown and a worsening business scenario. While most managements indicated of pressure pertaining for a couple of more quarters, none had a view when the things will actually start to improve at the clients’ end. In this article, we consolidate and summarise the December quarter performance of some of the large players.

Indian IT: Consolidated performance*
Consolidated financial snapshot Consolidated  Consolidated Change 
(Rs m) 2QFY09 3QFY09
Sales                      188,910                      196,973 4.3%
Expenditure                     140,050                      144,225 3.0%
Operating profit (EBDITA)             48,860   52,749 8.0%
Operating profit margin (%) 25.9% 26.8%
Other income                               422                                 47 -88.9%
Interest                          4,830                           4,432 -8.2%
Depreciation  1,209                           1,856 53.5%
Profit before tax                        43,243                        46,508 7.6%
Tax                           6,373                           6,416 0.7%
Minority interest                               114                               104 -8.9%
Equity in earning of affiliates                                113                              115 1.6%
Profit after tax/(loss)                       37,097                        40,311 8.7%
Net profit margin (%) 19.6% 20.5%
* Consolidation of results of Infosys, TCS, and Wipro

If we consolidate the September to December 2008 quarter (3QFY09) numbers of the three key players, sales have grown by 4% QoQ. Operating profits are up 8% QoQ on the back of a slight improvement in operating margins. The improvement in operating margins was largely on account of better utilisation of resources and cost containment. Rupee’s depreciation against the US dollar also helped these companies improve margins to some extent during the quarter. Infosys led the show on this front as its operating margins, already the highest among its peers, improved from to 35.1%, from 33.1% in 2QFY09.

As for the combined bottomline, the same registered a growth of 9% QoQ during 3QFY09. The growth would have been higher but for a sharp decline in other income, mainly on account of the forex losses that TCS incurred because of currency volatility.

What to expect?
Overall, given the tough market conditions that the companies are facing, the overall 3QFY09 performance can be termed as fair. The managements of all these companies have indicated caution for the coming few quarters. They have also indicated that pricing pressure is increasing as clients are rationalising their expenses. As regards the growth drivers, the managements believe that the future growth will come from verticals like manufacturing, health care and utility. However, times will remain challenging for technology, telecom, and banking and financial service segments.

We also believe that valuations of some of these companies are already factoring a deep slump in demand. The risk-return balance for investors in these stocks is currently favouring the latter. While we cannot say for sure how these stocks will behave in the short term, they present a compelling investment proposition for long term investors.

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