New Delhi: IT companies are ready to kickstart their earnings season with the announcement of quarterly financial results. However, the market sentiments are bleak on concerns that a sharp appreciation of rupee against the US dollar and other major foreign currencies such as British pound would eat into the profits of the export-focused Indian IT firms.
IT bellwether Infosys that announces its figures on July 11, is one of the many big firms that are under huge pressure of growing salaries and lowering earnings as a result of strengthening rupee against dollar.
There are other factors such as visa costs and annual salary hikes that would also take a significant part of the earnings away from the companies' quarterly results, the analysts believe.
Infosys, along with TCS, could see the biggest negative impact due to additional salary costs and they have already lost over 10 per cent in the past three months on concerns related to rupee appreciation. A number of other IT stocks have also been on a downtrend as well.
The visa window opens only during first quarter of every fiscal and the companies accordingly books the associated costs in their results. Moreover, there is a sharp surge in the number of new recruits during the quarter and many companies implement their annual salary hikes also during this time.
The annual salary hikes are fully reflected in first quarter results of Infosys and TCS, while some of the other frontline IT firms do the same either in the second quarter or spread it out over a different quarters. These cost factors are in addition to the much-talked about impact of rising rupee.
Analysts at global investment bank Morgan Stanley says rupee appreciation of 6.4 per cent during the quarter and rise in salaries would weigh on margins of IT firms. Visa costs would be another factor that would influence this quarterly figures.
A strong volume growth would be the prime driver of an estimated 25 per cent profit growth for the sector, Morgan Stanley analysts says in its research note.
In Infosys's case fundamentals are strong and what has made its earnings grow at a muted pace is the rupee appreciation. If any reversal in rupee-dollar rates happens, may be in the second half of this fiscal, then the earnings would bounce back, analysts at brokerage firm Karvy said.
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First quarter numbers are likely to be disappointing on account of over six per cent rupee appreciation against the US dollar and four per cent against pound sterling, Karvy said.
The market men anticipate attractive buying opportunities ahead, with share prices of IT big wigs falling on concerns of disappointing quarterly results.
Yet, they count on the strong giants from the IT pack—Infosys, Tata Consultancy Services, Wipro, Satyam Computer and HCL Technologies—and believe that any fall in their share prices would be limited to the short term and would be followed by a strong bounce-back soon afterwards.
"It couldn't have been worse for the IT service companies. During the first quarter, the margins of the frontline IT firms are generally dented by the cumulative impact of incremental cost of visa charges, the inflow of fresh employees and the annual salary hikes," analysts at domestic brokerage house Sharekhan said.
Besides, a steep appreciation in rupee against all major currencies in the first quarter added to the pressure on the margins, they added. The brokerage firm expects Infosys to report a sequential revenue growth of 2.1 per cent and a sequential decline of 14 per cent in net profit.
Rupee's average exchange rate of Rs 41.2 against the US currency is significantly above the Rs 42.30-43.10 assumed by most of the IT firms such as Infosys and Satyam in their previous guidance for the first quarter and entire fiscal.
Besides, unlike the past few quarters when rupee was appreciating only against the dollar, it gained against all other major currencies such as euro and pound in the last quarter.
According to Sharekhan, the rupee appreciated by 5.9 per cent against the basket of three major currencies on a weighted average basis.
The brokerage estimates a sequential decline of 10 per cent in the cumulative first-quarter earnings of the five front-line companies.
However, any knee-jerk negative reaction to quarterly results could be an attractive opportunity to accumulate these stocks, Sharekhan believes, as IT stocks have already underperformed grossly in the past couple of months in comparison to overall market trends and most of the negatives have already factored in their current valuations.
According to analysts at Kotak Institutional Equities, the IT sector has underperformed the Sensex by 13.5 per cent over the past three months and 15 per cent in six months.
"The recent correction in stock prices offers a good entry point" as the core business metrics, excluding currency, remain buoyant and the negatives are already in price, the analysts wrote in a research note. Kotak estimates over 15 per cent returns from front-line IT stocks in the next one year.
With PTI inputs
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