Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian IT: The 1QFY05 performance - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Aug 2, 2004

    Indian IT: The 1QFY05 performance

    Introduction to results
    Almost all major Indian IT companies have announced first quarter results for FY05, reporting strong performance in topline and slower rate of decline in operating margins. This quarter's performance was more of a carrying on with the good work that had been done in the last three quarters. After the pressure that these companies witnessed on the billing rates front owing to slowdown in the US economy and, thus, less spending towards fresh technology implementation, the last three quarters have witnessed stabilizing of billing rates and improved volume growth.

    Consolidated** financial performance: A snapshot
    (Rs m) 1QFY04 1QFY05 Change
    Net sales 43,586 46,076 5.7%
    Other income 480 982 104.6%
    Expenditure 32,412 34,190 5.5%
    Operating profit (EBDITA) 11,174 11,886 6.4%
    Operating profit margin (%) 25.6% 25.8%  
    Depreciation 943 938 -0.5%
    Profit before tax 10,711 11,930 11.4%
    Tax 1,750 1,707 -2.5%
    Profit after tax/(loss) 8,961 10,223 14.1%
    Net profit margin (%) 20.6% 22.2%  
    ** Consolidated to include results of Infosys, Wipro, Satyam, i-flex, MphasiS, Hughes and Geometric

    About the sector
    Global technology spending seems to be on an up-trend after the past couple of years of slowdown. However, the demand seems to be shifting from low-end services to high-end ones, like IT consulting, package implementation and systems integration. While Indian software companies are increasingly facing competition from global MNCs who are replicating the Indian offshoring model, the need of the hour for them (the Indian companies) is to rapidly move up the software value chain. For the Indian software industry, one of the biggest concerns in the medium term is the outsourcing backlash in the US. However, to grow in the long-term, scalability and quality offerings would be the key.

    As per the leading IT research and consultancy firm, Gartner, total worldwide IT services spending is expected to grow from US$ 535 bn in 2002 to US$ 727 bn by 2007, a CAGR growth of 6.3%. Also, as per NASSCOM, India's software services exports grew by 25% in FY04, from US$ 9.6 bn to US$ 12.5 bn. This represents a mere 1.6% of the global IT services market. NASSCOM also expects Indian IT services exports to cross the US$ 56 bn mark by FY08, which would mean CAGR of over 45% in the four-year period (FY04-FY08). Both these factors combine to signal Indian software sector's huge growth potential going forward.

    Stable rates and robust volumes drive performance in 1QFY05
    Sales: Initiatives on moving up the value chain gained speed during the quarter and have helped companies like Infosys, Wipro and Satyam increase contribution from high value services (like package implementation and systems integration) to their total revenues. This move towards high-end services has not only helped these software majors cap the decline in overall billing rates, it has, more importantly, brought their managements more closer to the clients (as these services have a higher onsite component, at least to start with), which is a long-term positive. For niche players like Geometric and Hughes, the fact that they are diversifying into newer related areas and improving quality of offerings, it seems just a matter of time before they move into the next higher orbit of companies.

    Operating margins: The margin improvement is despite the continued additions to the employee base and salary revisions that usually take place in the first quarter. This, therefore, seems a result of most of these companies benefiting from scale advantages from the investments that they have already made. Also, the companies' continued initiatives in moving work offshore have helped in the improvement of overall margins.

    Net profits: Apart from the strong topline growth, sequential net profit growth in 1QFY05 has been aided by a strong rise in other income. And this growth has been largely due to lower exchange losses that have seemingly been a result of depreciation of the rupee. It must be noted that since a large part (almost 95%) of Indian software companies' revenues are received in US dollar terms and expenditures are made in rupee terms, any depreciation in the rupee value benefits earnings growth (because companies get more rupees when they convert their dollar revenues).

    What to expect?
    At the current valuations, the average P/E multiple for the Indian software sector stands at 9.6x estimated FY06 earnings. As far as valuations of specific companies are concerned, most of them are trading at attractive valuations, but from a 2-3 year (FY06 onwards) perspective.

    While valuations might be affected in the short term due to eventualities (read, outsourcing backlash) like those we have just witnessed, fundamentals are likely to play a more important role in the long-term. Thus, the need of the hour for investors (and those waiting to be) in Indian software companies is to invest with a long-term horizon. Also, they need to invest in only those companies that have visionary managements and sound business models. Returns then will, take care of themselves.



    Equitymaster requests your view! Post a comment on "Indian IT: The 1QFY05 performance". Click here!


    More Views on News

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    Infosys: A Flat End to FY17 (Quarterly Results Update - Detailed)

    Apr 13, 2017

    Infosys ends FY17 with a 7% QoQ fall in net profit for the March quarter.

    Infosys: A Decent Quarter (Quarterly Results Update - Detailed)

    Jan 13, 2017

    Infosys has reported a 0.2% QoQ decrease in the topline and an increase of 4.6% QoQ in the bottomline for the quarter ended December 2016.

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 23, 2017 (Close)


    • Track your investment in INFOSYS LTD with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks


    Detailed Financial Information With Charts