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Software: 1QFY09 review

Aug 5, 2008

Amidst ongoing credit and economic crisis in the US and signs of slowdown in technology spending, Indian IT companies announced decent results for the first quarter of this fiscal. The undertone though remained cautious. The combined topline of the 4 biggies (TCS, Infosys, Wipro and Satyam) grew by 6% QoQ, mainly on account of higher volume and stable pricing. Although these companies did not witness any pricing pressure during the quarter, sporadic issues related to the same (pricing) did crop up in management talks. Managements also indicated of some delays in decision making from the clients' side due to restructuring happening there in wake of the financial troubles faced by their companies.

Indian IT: Consolidated performance*

Consolidated financial snapshot Consolidated Consolidated
(Rs m) 4QFY08 1QFY09 Change
Sales 187,714 199,220 6.1%
Expenditure 140,272 150,919 7.6%
Operating profit (EBDITA) 47,442 48,301 1.8%
Operating profit margin (%) 25.3% 24.2%
Other income 3,069 3,204 4.4%
Interest 2,113 1,954 -7.5%
Depreciation 3,582 3,804 6.2%
Profit before tax 44,817 45,746 2.1%
Tax 6,371 5,273 -17.2%
Minority interest 139 100 -28.0%
Equity in earning of affiliates 99 106 7.4%
Profit after tax/(loss) 38,406 40,479 5.4%
Net profit margin (%) 20.5% 20.3%
* Consolidation of results of Infosys, TCS, Satyam and Wipro

Coming on to the profitability, the same witnessed a 1% QoQ decline during the quarter. This can largely be attributed to higher salary and visa costs, which are generally first quarter phenomena. The depreciation of rupee against US dollars (rupee depreciated 8% against the US dollar in last 6 months) though pared some pressure off the margins. The consolidated bottomline grew by 5% QoQ during the quarter, impacted by a contraction in operating margins. Lower interest and tax expenses though aided this growth.

What to expect?
Although the IT sector registered a muted performance during 1QFY09, the picture looks satisfactory when one visualizes the same in the backdrop of financial crisis in the US, which has taken some sheen off technology spending and offshoring. This view was shared by managements of most of these companies. Going forward, the strategy of de-risking business from the US markets is expected to continue as companies focus their energies more in new geographies like the UK, Europe, Middle East and Asia Pacific. Caution will however remain the buzzword in the short to medium term.

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