Companies & Sectors
Indian IT services sector earnings preview: Lacklustre quarterly performance expected

The depreciating rupee, weak macroeconomic global environment, squeeze on margins and wage-hike related costs may cause strong headwinds

With the top four IT companies expected to report sub-6% q-o-q (quarter-on-quarter) dollar revenue growth (versus a figure close to 8% in Q1FY12 and 6%-12% in Q2FY11), it is expected that Q2FY12 will be a weak quarter in light of otherwise favourable seasonality. Infosys is likely to lower its FY12 dollar revenue growth guidance by 2% (from 18%-20% y-o-y, i.e., year-on-year), which will be a key negative, underlining the weakness in demand. These are the observations and findings of an IDFC report on the subject.

It is expected that dollar revenue growth will be in the range of 3.4%-6.5% q-o-q across Tier-1 IT companies, with Cognizant and TCS (Tata Consultancy Services) leading revenue growth. Infosys and Wipro are expected be in line with guidance. The impact of the recent economic slowdown is unlikely to be visible in results this quarter, according to Nomura Equity Research.
According to PINC Research, the IT sector's Q2FY12 results will reflect good revenue growth and margin improvement, but forex losses will dent the profits as a result of significant rupee depreciation in quarter-end rates. However, rupee depreciation will help in better margins in Q2FY12 and can sustain in Q3 if the rupee remains weak.

It is expected that Tier-2 companies will report 1%-5% dollar revenue growth (versus about 5% in Q1FY12 and about 9% in Q2FY11). While rupee depreciation (about 4% on a monthly average basis and about 2% on a daily average basis) would be a key margin tailwind for the entire coverage universe in the quarter, wage hike-related headwinds for a few can also be observed. With rising macroeconomic uncertainty, most companies in the sector will incrementally cite caution.

IDFC expects the top four IT services companies to report muted results despite the seasonal strength. Sequentially, HCL Technologies, TCS and Infosys are estimated to deliver 5%-6% dollar revenue growth (versus 10%-12% in Q2FY11) and Wipro may report about 4% (versus 6% in Q2FY11). Revenues for all would be volume-driven with some decline in price realisation-about 70bps (basis points) due to cross-currency headwinds). The recent sharp rupee depreciation will be a key margin tailwind for all. Infosys is expected to report the highest margin expansion of about 80bps, followed by about 90bps by TCS (headwinds from promotion-related costs). Wipro and HCL Tech are likely to deliver a margin decline of about 80bps to120bps due to two months and full quarter wage hike impact, respectively.

Dull revenue growth and modest margin improvement in Tier-2 companies are likely to deliver a modest 2%-5% q-o-q revenue growth and about 100bps q-o-q margin expansion. While most Tier-2 companies have significantly lost margins over the past 3-4 quarters, margins could expand for Q2FY12 driven by a weaker rupee, operational efficiencies and broadening employee pyramid. Majority of the companies are also expected to witness a decline in attrition rates amidst the macroeconomic uncertainties. Tech Mahindra is expected to report margin decline of about 150bps due to the impact of wage hikes.
According to Nomura, HCL Technologies is expected to be the top performer within Tier-1 IT companies on expectations of strong revenue growth (5.4% q-o-q); lower EBITDA (earnings before interest, tax, depreciation and amortisation) margin declines despite wage hikes and rupee depreciation; it is also expected to receive a boost due to reasonable valuation comfort. TCS and Cognizant have high BFSI exposure and client concentration. Further, both tech giants have a high exposure to Europe, which is a negative considering the debt problems plaguing the continent.


Illegal mining may lead to closure of legal mines: Goa PAC report

The report says that illegal mining has resulted in strain on infrastructure, ecology, agriculture and threatens to destroy the water security of the state if it is not controlled immediately

Panaji: Goa assembly's Public Accounts Committee (PAC) is understood to have expressed fears that if illegal mining in the state is not curbed, even the legal mines here will face closure, reports PTI.

The PAC report, which will be tabled in the House during the assembly session that begins from today, has reportedly indicted the state government for allegedly encouraging illegal mining.

It is learnt that the report says that illegal mining has resulted in strain on infrastructure, ecology, agriculture and threatens to destroy the water security of the state if it is not controlled immediately.

"During the series of meetings, the PAC observed that the overburden of illegal mining is damaging the prospects of legal mining," the source stated.

The PAC report, which has relied on the data provided by Directorate of Mines and Geology (DOMG) and the Forest Department, has calculated that annually around 20 million tonnes of ore is exported from the state.

"The total value of the ore that is mined in violation of the law on mining and environment exceeds Rs4,000 crore annually," highly placed sources stated.

It is learnt that the report has directly indicted politicians and officers from the Mines as well as the Forest Department, including their secretaries and director of Mines Department.

According to sources, the report says that details like involvement of politicians, quantum of illegalities and financial transactions, etc. can only be known after a thorough investigation.

The report is understood to have recommended that an independent agency like the Central Bureau of Investigation (CBI) or Lokayukta be asked to probe into illegal mining nexus being carried out in connivance of local politicians, bureaucrats of the Mines and Forest departments and police force.


ONGC ready for over Rs11,000 share sale, govt to decide timing

The follow-on public offer, through which the government plans to sell 5% or 427.77 million shares, was to open on 20th September, but has been put off days ahead of its opening. No new dates have been communicated

New Delhi: State-owned explorer Oil and Natural Gas Corporation (ONGC) on Tuesday said it is ready for the Rs11,500 crore share sale but the call on its timing will have to be taken by the government, reports PTI.

"The government of India (which plans to sell 5% of its stake in ONGC through the follow-on public offer) has to take a call. We are prepared,” ONGC chairman and managing director Sudhir Vasudeva told reporters here.

The government had on 15th September postponed the FPO owing to market uncertainties.

“The market has been behaving erratically,” he said, “The government has to take a call (on the FPO).”

The follow-on public offer (FPO) was to open on 20th September, but has been put off days ahead of its opening. No new dates have been communicated.

The government plans to sell 5%, or 427.77 million shares, through the offer.

After the FPO, the government’s stake in ONGC will come down to 69.14% from the current 74.14%.

The FPO was originally planned in 2010-11, but the launch was later deferred to 5th April, as the company did not have an adequate number of independent directors on its board to meet market regulator Securities and Exchange Board of India’s (SEBI) listing norms.

It was then rescheduled for 5th July, but was again deferred due to adverse market conditions.


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