Friday, January 2, 2009

Q3FY2009 IT earnings preview: Sharekhan Special dated January 02, 2009

Sharekhan Special
[January 02, 2009]
Summary of Contents


Q3FY2009 IT earnings preview

  • The top line of the front-line information technology (IT) companies is expected to grow in the range 6.1-11.7% in Q3FY2009. The growth in the top line is expected to be primarily driven by the depreciation in the rupee against the US Dollar. The rupee's depreciation is likely to contribute 10-12% of the top line growth for the front-line IT companies.
  • In dollar terms, we expect the front-line IT companies to miss the revenue guidance on account of a sharp cross-currency movement and muted volume growth owing to a lower utilisation rate during the quarter. The utilisation rate was lower during the third quarter on account of a weakening demand environment and a lesser number of working days in the quarter.
  • On the margin front, Infosys Technologies (Infosys), Tata Consultancy Services (TCS) and Satyam Computer Services (Satyam) are expected to show an improvement of 50 to 75 basis points in their margin largely because of the rupee's depreciation against the dollar. In case of Wipro, we expect approximately a 15–basis-point decline in its operating profit margin (OPM) on account of the full quarter impact of the offshore wage hike given in the previous quarter effective from August 2008 and the salary hike given to the business process outsourcing (BPO) staff effective from October 2008. For HCL Technologies (HCL Tech), we expect the OPM to decline by around ten basis points largely on account of the full quarter impact of the lower-margin Liberata Financial Services (Liberata) and Control Point Solutions (CPS) acquisitions made in the previous quarter and the partial impact of the Axon acquisition. 
  • On the hedging front, Infosys and Satyam are going to benefit from the depreciation in the rupee against the US Dollar during the quarter. In case of TCS, the hedge positions of USD180 million (at an exchange of rate of Rs39-41.82) and USD300 million (at an exchange rate of Rs43.15-46.5) are expected to mature in this quarter. Hence, we expect foreign exchange (forex) losses of over Rs260 crore during the quarter.
  • Given the sharp movement in the cross currency, the focus of the street would be on Infosys' FY2009 dollar term revenue guidance. As per our calculation, Infosys is likely to cut the dollar term revenue guidance for FY2009 by 1.0-1.5% (from 13.1-15.2% guided in previous quarter) on account of the cross-currency impact.
  • The street would also focus on the management commentary on the indicators such as the expectations for CY2009 IT budget cycle finalisation, project renewals and cancellations, the extent of price cuts (as price cuts is imminent in a weakening demand environment) and any revision in the hiring targets (including campus hiring for the next year). Apart from this, the management commentary on margin levers, such as wage hike and any reduction in sales, general and administrative (SG&A) expenses, the extension of days sales outstanding (DSO) days and the provision for doubtful debts, would be focus areas for the street. 
  • In case of Satyam, after the proposed Satyam-Maytas deal (which was subsequently revoked), we believe the street would focus more on the concerns over the corporate governance issue and the possibility of a change in the management rather than the Q3FY2009 results. Hence, the outcome of Satyam's board meeting on January 10, 2009 is going to be closely watched.

Click here to read report:  Sharekhan Special 

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