SECTOR WATCH: IT Services

Q4 review: The March 2007 quarter ended on a weak note for the three frontline IT services firms, TCS, Infosys Technologies and Wipro, as they reported lower growth in sales and profits compared with the previous three quarters.

Satyam Computer, however, did well in both sales and profits growth. It demonstrated good volume growth, offshore shift and attrition control. Increasing attrition plagued the top three IT firms. While Infosys pulled back in the fourth quarter, TCS and Wipro saw an increase in attrition in the financial year.

Trigger: The rupee appreciation in the current quarter is likely to have a severe impact on revenues and profits. The rupee has firmed up by an average of 10 per cent to quote at around 41.30, while the IT majors had calculated the rupee at 42.30-43.50 in their guidance estimates.

Outlook: Infosys has estimated a margin drop up to 50-60 basis points for the first quarter of this financial year, if the rupee were to quote at Rs 43.1 a dollar. Satyam’s guidance talked about flat margins based on Rs 42.3 a dollar, while TCS indicated flat year-on-year margins, with the rupee at 43.5 a dollar.

The rupee’s appreciation has exceeded the projections by around 4.2 per cent in case of Infosys, 5.05 per cent for TCS and 2.40 per cent for Satyam. The software majors are thus expected to post a decline in the Q1 margins.

According to a CLSA report, every one-rupee appreciation would knock off 35-40 basis points from the operating margins and 1.6 per cent from the earnings of software majors. With the rupee currently quoting at $41, CLSA has projected a decline in the operating margins by 150-230 basis points in the first quarter of 2008. To reduce the impact of the strengthening rupee, the top IT companies have increased their forex cover.

TCS has increased its forex cover across vendors by $1,500 million, Infosys upped it by $1,000 million, HCL Technologies $900 million and Wipro and Satyam Computer by $600 million each. The increase in forex covers would help the companies to arrest the decline in margins in case the rupee appreciates further