All eyes on Infosys earnings report next week

Pressure on IT companies to keep year-over-year growth rate ticking

By R Chandrasekaran

CHENNAI: As in the past, technology bellwether and India’s second biggest software exporter Infosys will kick start the June quarterly earnings season for Indian IT companies on July 12. Other IT companies such as Tata Consultancy Services, Wipro, HCL Technologies and Tech Mahindra will follow suit.

The Indian IT companies’ results will come on the heels of disappointing quarterly numbers from Accenture plc and Oracle. Both the companies have also cut down their annual revenue guidance and blamed weak spending by consulting business clients for doing so. This is one of the areas where Indian IT companies too will get unfavorably impacted especially with the hostility shown by countries like Canada and Australia.

Indian IT companies generate more than 50 percent of their revenues from the U.S. and the Asia Pacific contributes a little less than 10 percent of revenues. The Europe represents about 20 percent of total revenues for the Indian IT firms.

Most of the companies announce their annual increase in pay to its staff during the June quarter. The IT companies are already spending more money on H1B visas during the past few years. There is also tremendous pressure on pricing and invariably they have to settle down to a lower margin projects to keep the year-over-year growth rate ticking.

Ever since the U.S. slipped into recession in 2008 – 2009, the Indian IT companies have been struggling to maintain their growth rate in the absence of discretionary spending. The current quarter is of no exception and the coming quarters too are predicted to remain in the same way.

At the start of the financial year, National Association of Software Service Companies (NASSCOM) predicted revenues to grow 12 – 14 percent. While TCS and Cognizant Technology Solutions projected to outperform industry, Infosys lagged behind by guiding only 6 – 10 percent. Wipro, which forecast below market expectations for the first quarter, will be closely watched for its outlook for the next quarter since it refrains from giving annual guidance.

While Infosys will struggle for quarter-over-quarter revenue growth given the execution problems it has been facing of late, TCS and Cognizant are likely to have grown both Q-o-Q as well as year-over-year. There is also a strong possibility of a fall in Q-o-Q revenue for Infosys due to weak spending on IT. There is not going to be a Narayana Murthy effect during the quarter. As he himself indicated in the company’s annual general meeting, he needs at least three years to transform the company.

If there is a view that the weakening Rupee will come in handy for the Indian IT companies, its impact will not be felt at least in the first quarter. It may have impact probably in the second quarter. The fall in Rupee value could at best arrest the pressured operating margins on higher costs to some extent.

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