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Software: What can change the outlook?

Jul 4, 2008

Indian information technology (IT) firms had a challenging FY08, as appreciating rupee and financial service sector crisis in the US hindered the pace of their growth. Starting from the second week of July, we shall see inflow of information and views from these companies' managements as they announce their April to June quarter results. These results in fact come at a crucial time as they will not only help gauge the 1QFY09 performance but also the future outlook for the sector. Here are certain facets that investors can look out for over the next few weeks to determine the progress of initiatives that these IT companies have taken over the past few quarters.

  • Infosy's first quarter result on July 11th: Infosys has been major trendsetter for the Indian IT industry. The management gives good insights into the industry dynamics and the company's results generally set the tone for other Tier I companies and the sector at large. The key things to watch out here are whether the company has been able to maintain pricing (billing rate) over the past quarter or not, given that the management had indicated of a couple of quarters of pressure situation while announcing its FY08 numbers. Pace of growth in volumes and revenue from the banking and financial services (BFSI) vertical are the other key factors to watch out for.

  • Order inflow: In the US, IT budgets are generally finalised for the coming year by December of the previous year. However, if one were to go by what Indian IT companies had reported some time back, this year has seen clients taking a little longer to finalise the same. This was largely due to uncertainty prevailing in the US economy. The actual IT budgets finalised by the clients are most likely to be available with 1QFY09 results. Any reported increase in order flows will be a positive for the sector.

  • European market focus: In recent times, Indian IT companies have been penetrating the Western European IT services market aggressively. There are strong indications that this is the next target growth region for offshore services. The India-based providers have taken a conclusive lead in this area against other more traditional IT services providers. According to Gartner, the gap between Indian vendors and the traditional service providers in terms of global delivery competencies and multicountry delivery sites has narrowed. Addition of project from especially Western Europe can significantly drive up revenue of Indian IT service providers. The following table elucidates Indian IT companies' increasing revenue share in the Western European region.

    IT Services Revenue in Western Europe for Indian IT's Top Six (US$ m)
    Rank Vendor 2006 2007 YoY growth
    28 TCS 1,044 1,516 45.2%
    36 Wipro 683 1,046 53.1%
    37 Infosys 708 1,029 45.3%
    73 HCL 324 499 54.0%
    82 Satyam 254 395 55.5%
    88 Cognizant 184 344 87.0%
    Source: Gartner

  • Currency movement: The movement in currency (Indian rupee against US dollar) had caught everyone off guard in FY08. The 11% appreciation in a year negatively impacted operating margins of IT companies at an average rate of 0.3% to 0.5. In fact, over the past two years, the rupee had appreciated by around 20% against the US dollar. However, this phase of appreciation ended by the end of last year. This year has seen the rupee actually depreciating against the dollar (over the past six months, the currency has depreciated by 8% against the dollar). Given the high and rising outflow of US dollar from Indian financial markets in India on the back of a sharp decline in prices, the rupee is expected top remain weak. According to a report on Bloomberg, JP Morgan Chase & Co, expects the rupee to weaken to Rs 45/US$ by the end of the year, against an earlier forecast of Rs 40/US$. This could bring some respite to the IT companies that see a majority of their billings in greenback.

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