IT companies' Q2 numbers on track

The July-September quarter of the 2011-12 financial year is expected to see Indian information technology (IT) services firms meet their guidance.

However, analysts are awaiting a commentary on the demand environment that would allow them a peek into the clients' budgets for the calendar year 2012.

"We would welcome any initial commentary on the CY12 IT budgets, but we do not expect much colour, as it is too early for that. We believe that clients might have just started their budgeting process for the CY12 and IT services budgets are unlikely to be finalised before December," said research analyst Viju George and Amit Sharma of JP Morgan, Asia Pacific Equity Research, in their report.

The key aspect, according to several analysts tracking the global markets, is IT budgets will hold on for some time. Unlike 2008, there are no sudden surprises. According to a recent Forrester Research report, while the global economy is slow, growth is still positive for 2011 and 2012."

"For the US markets, we are now projecting seven per cent growth for 2011, down slightly from our April forecast of eight per cent. Software will have the strongest growth in 2012, rising by 8.1 per cent after 5.8 per cent in 2011.

IT consulting and systems integration services will rise by 9.1 per cent in 2011 and eight per cent in 2012, because companies buy these services to plan for or to help implement the software they purchase.

IT outsourcing will lag with 7.5 per cent growth in 2011 and 5.3 per cent growth in 2012, as the movement toward more narrowly focused outsourcing and price competition drives down average deal sizes," said Andrew Bartels of Forrester in his report.

Even in regions of Europe that have been under severe pressure, IT firms are expecting good offshore work. One of the reasons is the low penetration of offshoring done by European firms.

"In Europe, many large banks and companies from other sectors are prioritising volume growth and transformational improvements over pricing cuts.

While this will give offshore firms significant growth opportunities, it also will present many with complex challenges as new organisational capabilities and a shift in mindset are required. The companies that master this best will capture this new growth wave," said Peter Schumacher, president and CEO of Value Leadership Group.

For the quarter ending September 30, the depreciation

of the Indian rupee against the US dollar will mean a positive impact on topline.

In US dollar revenue, the topline of the top four IT firms is expected to grow five to six per cent quarter-on-quarter and seven to eight per cent in the rupee.

The appreciation of the US dollar to other currencies, however, will have a negative impact for the Indian IT firms. Depending on the hedging positions, each company will have a positive or negative impact on other income.

In case of Tata Consultancy Services (TCS) and Wipro, analysts are expecting loss in foreign exchange earnings due to a large hedging posture for a longer period.

TCS is expected to report loss of around Rs 175 crore (Rs 1.75 billion). On the other hand, Infosys and HCL Technologies will gain in foreign exchange earnings.

The uncertainty in the demand environment might make Infosys, India's second-largest IT services firm, to lower its guidance.

"We believe Infosys is likely to lower its FY12 revenue growth guidance at the announcement of results for the second quarter of FY12. This would be marginally reduced by one or two per cent, mainly due to the currency movement. Besides the market is anyway factoring in the lower part of the guidance," said an analyst from a leading brokerage house.

In terms of volume growth, analysts believe TCS and Cognizant will again lead the pack, followed by Infosys and HCL Technologies.

"We expect robust sequential volume growth (4-7 per cent) for most players in the industry barring Wipro among the Tier-I players and Mphasis/Tech Mahindra among the Tier-II names. Wipro is likely to lag, though on expected lines," said a report by Kotak Institutional Equities.

"I think firms would manage growth for the September ending quarter and the third quarter (ending December) for FY12.

The important quarters would be the fourth quarter and the first quarter of FY13. Because any slowdown in demand or sales cycles will be evident in these quarters," said another analyst tracking the sector.

A report by IDFC Securities also noted that the management has indicated that FY12 would be an evenly paced year in terms of quarterly revenue growth, in contrast to a usually stronger Q1/Q2.

However, the FY12 guidance implies a stronger second half. Even if revenues meet the higher end of the Q2 guidance, they would still have to grow by about 11 per cent in 2HFY12 to meet the higher end of the FY12 outlook. Infosys had guided for 18-20 per cent USD revenue growth for FY12 at the beginning of the fiscal.