Software: Preview 4QFY05... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Software: Preview 4QFY05...

Apr 4, 2005

The bulls in the markets seem to be back on track in the last week, after a largely bearish sentiment prevailed in the past few trading sessions. The apprehension was mainly on account of a number of factors. These included broker margin calls, year-end adjustments, higher US rates, reflecting the possibility of Foreign Institutional Investors (FIIs) money flowing out of the markets, high crude oil prices, which could impact corporate profitability and profit booking after the markets touched their lifetime highs. Towards the end of last week's trade, the bulls firmly established themselves mainly on account of bottom fishing at bargain levels and expectations of good quarterly results from corporate India. Software companies are among the first off the blocks to announce their results and this time is going to be no different. MphasiS BFL is scheduled to do so on April 11. Most of the industry majors have been reporting healthy topline growth in the past few quarters. These include the top tier end-to-end service providers like Infosys, TCS and Wipro, as well as the niche players like Geometric Software and i-flex solutions. A combination of a healthy increase in volumes, stability in billing rates and a steady move up the value chain has been the key contributor to this growth.

Software majors*: Leading the way...
(Rs m) 2QFY05 3QFY05 Change 9mFY04 9mFY05 Change
Sales 61,685 65,578 6.31% 126,553 181,444 43.4%
Expenditure 43,989 46,660 6.07% 93,654 129,527 38.3%
Operating profit (EBDITA) 17,696 18,919 6.91% 32,898 51,917 57.8%
Operating profit margin (%) 28.7% 28.8% 26.0% 28.6%
Other income 364 1,775 387.6% 2,713 2,718 0.2%
Depreciation 1176 1395 18.6% 3,118 3,612 15.8%
Profit before tax 16,869 19,275 14.3% 32,465 50,973 57.0%
Extraordinary items (2,087) 4 (100.2%) (89) (2,083) 2,240%
Tax 2,468 2,939 19.1% 4,788 7,666 60.1%
Profit after tax/(loss) 12,269 16,334 33.1% 27,622 41,109 48.8%
Net profit margin (%) 19.9% 24.9% 21.8% 22.7%  
No. of shares 1,447.0 1,447.0   979.5 1,447.0  
* These are the combined results of Infosys, TCS and Wipro for the respective periods

Despite depreciation of the dollar against the rupee this year, software companies have still managed to grow their revenues at a decent clip, aided slightly by hedging their receivables. However, margins have been impacted due to the rupee appreciation. Also, increased hiring, particularly by the top rung companies, as well as higher employee costs on account of wage cost inflation has led to some impairment on the margin front. This is expected to continue going forward and will increasingly put pressure on margins, as these companies rapidly scale up their operations for an anticipated increase in business.

Infosys: Employee pressure!
FY01 FY02 FY03 FY04 CAGR
No. of employees 9,831 10,738 15,356 25,634 38%
Employee costs (Rs m) 7,178 11,179 16,771 23,659 49%
% of revenues 37.8% 42.9% 46.5% 49.7%  

Volumes have grown at a very healthy rate for software companies. There has been a slight economic recovery in the US market, increased acknowledgement of the offshore outsourcing model, tapping of new geographies like Europe and globally, an increasing need for becoming more efficient in a hyper-competitive global market. We believe that these factors will drive volume growth going forward and this will be the key driver of an increased topline.

Billing rates have largely remained stable, with a very slight variation either side. With software majors increasingly moving up the value chain into services like IT consulting, these high-end services are expected to contribute more significantly to revenues for the end-to-end service providers like Infosys and TCS. The offshore part of revenues is also expected to increase going forward, as these companies start building capabilities in high-end services and are able to execute them at their locations around the globe. This will pare the margin pressure to some extent.

What to expect?

Software companies in general have shown impressive growth over the past few quarters, mainly due to impressive volume growth and the famed global delivery model. We expect this to continue going forward, as companies tap new business verticals, enter new geographies and diversify their product offerings. These are critical in order to provide more value and 'returns per IT rupee/dollar' to their clients.

We expect billing rates to remain stable with a very slight variation. However, margin pressure will continue due to increased movement up the value chain. In this quarter, we do not expect the rupee-dollar exchange rate to have much of an impact on margins since there was not much of depreciation of the dollar. In fact, the dollar actually finished higher at the end of the quarter than its levels at the beginning. But we believe that this was merely a technical pullback due to factors such as high inflation in the US and rising US interest rates.

Apart from these factors, increased hiring in order to ramp up operations will result in higher employee costs and wage inflation. This will have a negative impact on margins. Companies that move up the value chain faster and move a higher proportion of work offshore will keep margin pressure at bay.

Equitymaster requests your view! Post a comment on "Software: Preview 4QFY05...". Click here!

  

More Views on News

KPIT TECHNOLOGIES Share Price Up by 5%; BSE IT Index Up 0.4% (Market Updates)

Mar 9, 2021 | Updated on Mar 9, 2021

KPIT TECHNOLOGIES share price is trading up by 5% and its current market price is Rs 152. The BSE IT is up by 0.4%. The top gainers in the BSE IT Index is KPIT TECHNOLOGIES (up 5.3%). The top losers are PERSISTENT SYSTEMS (down 0.1%) and FIRSTSOURCE SOLUTIONS (down 0.9%).

More Views on News

Most Popular

It's the Beginning of a New Bull Phase in Smallcaps (Profit Hunter)

Feb 24, 2021

Last time the smallcap index crossed 19k a big correction followed. Here's what makes it different this time.

Make Rs 5,000 Per Day Trading the Market (Fast Profits Daily)

Feb 25, 2021

In this video, I'll show you how to get started on the path to daily trading profits.

Charge Your Portfolio with this Smallcap Proxy Play on India's EV Revolution (Profit Hunter)

Mar 5, 2021

This could be the biggest wealth creator of the decade.

Gold 65,000 and Silver 84,000 in 2022

Feb 26, 2021

In this episode of the Investor Hour, India's #1 trader, Vijay Bhambwani, talks to us about the stock market, his new targets for gold and silver, the best long-term investment opportunity, and a lot more.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE IT


Mar 9, 2021 10:40 AM

S&P BSE IT 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS