Tech results: Can others do an Infy?

Infosys has kicked off the first quarter tech results in style and markets now expect other IT majors to follow suit. Would they be able to deliver and sustain the momentum for the rest of the year? By Rex Mathew

Infosys first quarter results, announced this morning, were critical for the markets as the sentiment had turned very negative after yesterday's terror attacks on Mumbai. The company, which sets the sentiment at the beginning of every results season, stunned the markets with a 50-per cent y-o-y rise in net profit and guidance upgrade for Q2 and FY 06-07. The markets promptly shook-off the pessimism and the Sensex soared to end with gains of over 300 points.

This was in stark contrast to the disappointment following the announcement of first quarter results and guidance by Infosys and Wipro in July last year. The sharp fall in prices of tech stocks following the results announcement, led to substantial weakness in the frontline indices. Only TCS managed to pull off a positive surprise last year.

This year, markets are waiting eagerly for a good set of first-quarter numbers from the technology majors for confirmation that corporate profitability growth would sustain. The markets are struggling to recover from the May-June crash and any disappointment from the other technology majors would severely dent market confidence and lead to a sharp fall.

Rising wage costs
The biggest challenge facing domestic IT companies is retention of talent without significantly pushing up the wage bill. As the Infosys top management said today, it is a market which is decided by the talent a company can attract. If an IT company has enough human resources, there is no dearth of orders for it.

The IT sector is expected to recruit more than three lakh new employees this year. Of this, the top four Indian IT companies — TCS, Infosys, Wipro and Satyam — would collectively recruit more than 90,000 professionals.

Global giants like IBM, Accenture, Cap Gemini and EDS have significantly stepped up their operations in India. This has created a surge in demand for experienced professionals over the last couple of years and salary levels have also gone up correspondingly.

Indian IT majors have hiked salaries by an average of 15 per cent (ranging between an 18 per cent hike by Satyam and 11 per cent by TCS) during the last quarter. Almost all of them have increased perks in the form of paid holidays and subsidies on home loans.

Despite higher salaries, Indian companies have seen attrition rates going up over the last many quarters. Satyam remains the worst hit in terms of attrition levels, which crossed 19 per cent during the last quarter of 2005-06. Even TCS, which has traditionally the lowest attrition in the industry, is facing pressure with net attrition levels nearing 10 per cent.

The rush to attract fresh talent has forced the IT majors to abandon a freeze on entry level salaries. All the major companies are making attractive offers to graduating students even from tier-II colleges in smaller towns.

It is reported that Infosys is now offering around Rs2.7 lakh per annum to fresh recruits — an increase of more than 25 per cent — compared to last year. Other majors are also offering an average of Rs2.5 lakh per annum.

The companies do not seem bothered about rising costs as they are building bench strength to ensure that sufficient resources are available to sustain growth rates. They would take a real hit if the US economy slows down, leading to a drying up of new contracts and pricing pressures.

Rupee boost
Technology companies would benefit from the decline in rupee value during the quarter. The rupee declined more than 3 per cent against the US dollar during the April-June quarter. Analysts estimate that every percentage decline in the value of the rupee would lead to an improvement of nearly 40 basis points in the margins of large IT companies.

However, gains would be limited as most of the frontline IT companies had taken forward covers at lower rates during the previous quarter. All the four frontline companies had enough currency forward contracts to cover revenues for a few months.

Margin squeeze
Most analysts have forecast a decline in operating margins of all four frontline companies during the first quarter. Apart from higher salaries, some of the large deals done at lower margins would also exert pressure on margins. Some of the overseas acquisitions made by the major companies would also pull down consolidated margins.

Strong volume growth and stable pricing would help these companies to more than offset the fall in operating margins. All the four companies can be expected to report strong growth in top line as well as bottom line.

TCS may see a sharp 200 basis point fall in operating margins as the share of large projects increase. The merger of Tata Infotech would also impact margins. The company is expected to report a more than 35 per cent rise in profits on nearly 50 per cent rise in revenues.

Wipro is expected to come out with a 40-per cent jump in the bottom line on global IT revenue growth of over 35 per cent. Satyam is forecast to be the best performer among the pack with a more than 50 per cent increase in net profits on revenue growth of close to 35 per cent.

Infosys has repeatedly stated that the business environment this year is considerably more positive than same time last year. There are enough new orders coming up and existing clients are also ramping up. In line with this outlook, Wipro and Satyam are expected to be upbeat on their prospects for the coming quarters. TCS usually does not give guidance on future earnings or revenues, but may give some positive sound bites on business outlook this time.