Top 4 IT firms post modest results

Muted rupee-term guidance, no upward revision in dollar-term guidance, an uncertain global business environment, forex losses due to over-hedged positions and low volume growth by the top four Indian IT firms this week spooked investors on Friday.

Even as the Bombay Stock Exchange's (BSE's) benchmark Sensex rose by 523.55 points, the overall IT index fell 2.6 per cent.

The country's fourth-largest IT firm, Satyam Computer Services, surprised analysts with a sequential (QoQ) growth rate of 17.3 per cent (Indian GAAP) in its net profit.

It also registered a 44.8 per cent year-on-year (YoY) net profit growth rate for the quarter under review,mainly on the back of increased business activity in the Asia-Pacific and West-Asian markets, according to chairman B Ramalinga Raju. Yet, its stock was flogged the most since it did not revise its dollar-term guidance upwards.

Moreover, unlike Tata Consultancy Services (TCS) and Infosys Technologies, which posted growth rates in line with expectations despite wage increases, Satyam will be implementing its increments in Q2 (July-September 2008 quarter), which would impact margins further.

OFF-TECH
Company	June 30, 2008		Y-o-Y		Forex loss for Q1 (cr)
	Revenue	PAT	Rev	PAT
	(Rs cr)		(%)
TCS	6,411.0	1,291.0	24.0	7.3	75.3
Infosys	4,854.0	1,302.0	28.7	20.7	80.0
Wipro	4,405.0	907.8	43.0	25.0	68.3
Satyam	2,621.0	548.0	43.2	45.0	36.0

 So is the case with Wipro Limited - the $5 billion software-to-soaps major - which reported a 25 per cent YoY increase in its net profit and 43 per cent rise in its top line.

Its flagship software services exports arm, Wipro Technologies - which contributes nearly 75 per cent to its revenues -  reported top line growth of 39 per cent YoY, backed by better utilisation, better pricing realisation both for onsite and offshore, and good returns from fixed-priced projects and outcome-based pricing.

However, QoQ, the top line of the software business moved up 3.5 per cent and the company has cautiously guided the Street that it will grow by a mere 2 per cent for the second quarter on a QoQ basis since it has to implement wage increases.

Earlier this week, Infosys too did not revise its guidance in dollar terms which explains the fall in its stock. TCS does not provide quarterly guidance. Analysts note that this implies that the growth of these firms merely reflected the benefits of a falling rupee against the dollar - around 4.5 per cent average depreciation this quarter.

Poor volume growth: Moreover, while the first quarter is generally very slow, the second quarter guidance by these IT firms is low, which is why the markets did not take too kindly to the Satyam and Wipro stocks. Besides, the volume growth - the number of orders that a firm gets - of some of the firms is not up to the mark. Except for Satyam with 3 per cent, all others were disappointing - TCS reported a volume growth rate of just 1.3 per cent, Infosys 0.5 and Wipro was almost flat.

Cautionary note: Incidentally, all the IT firms have expressed "caution over the global business environment". Azim Premji, Chairman of Wipro, admitted that "there is a fair amount of pain in the US". The US and UK account for over 85 per cent of their business.

Hedging goes awry: All companies posted forex losses - TCS (Rs 75.3 crore); Infosys (Rs 80 crore); Satyam (Rs 36 crore); and Wipro (Rs 68.30 crore). Besides, Wipro made a mark-to-market (MTM) provision of Rs 934 crore with a hedging of $2.6 billion.If the rupee falls further, IT firms which have over-hedged positions may not benefit, and are likely to book more forex losses.

Pain in Banking, Financial Service and Insurance (BFSI) segment: The Wipro management also acknowledged it was noticing a few cases of clients in the BFSI sector coming in and asking for re-negotiation of pricing.

The company said this is basically from those clients who were badly hit due to the US subprime crisis and slowdown. Satyam too is yet to see clear and consistent signals emanating from the BSFI sector. TCS had client-specific issues in this segment. Only Infosys improved its performance in this space.