India's top software exporters can be expected to report a bump in margins, aided by a weak rupee, while ekeing out revenue growth to meet expectations in an uncertain business environment.
For Tata Consultancy Services, Infosys, Wipro and HCL Technologies, which all turn in their earnings report cards for the September-December quarter this month, the mini currency bonanza will provide some short-lived cheer before they redouble efforts to win orders, possibly triggering a price war.
The rupee, the worst-performing Asian currency, has fallen more than 15% against the dollar, and this is expected to result in a margin boost of up to 300 basis points. Revenue growth for the top four IT services providers in sequential terms is expected to be within the projected range of 3-5%.
"We would have been happier if we had pure business reasons to cheer about, but for now, the rupee is the White Knight," the chief executive of a large software company said. He spoke on condition of anonymity because his company is in the mandatory 'silent period' ahead of the announcement of results. "With pressures of wage hikes and no clear improvement in rates, it could have been a lot worse otherwise," he added.
In addition to an uncertain business climate, software exporters are also being delivered pinpricks by the US government. Companies are finding that it is becoming tougher to send professionals on projects to the US because the country is issuing far fewer work permits than earlier while making the process cumbersome.
Among the top-tier firms, Infosys has been most vocal about the environment for doing business, saying clients are delaying decisions.
The Bangalore-based company will be the first to report earnings on January 12. Chief Financial Officer V Balakrishnan has warned investors already that his company may not achieve the upper-end growth forecast of 17.1-19.1% for the financial year ending March 2012.
The rest have been more sanguine, observing that there are no red flags to worry about yet. With the rupee weak and orders not easy to come by, companies are expected to quote lower rates to build volumes. This, in turn, could result in a full-blown price war.
"You suddenly feel that with the currency lever, sales can get a little more aggressive on pricing," the CEO of another top tech firm told ET. By offering customers lower rates for more work, companies can ensure volume growth even during an uncertain environment, he added.
Cognizant, Wipro and HCL could be the ones cutting prices most aggressively, ploughing the benefits from currency gains into an effort to gain volumes, brokerage house CLSA wrote on Tuesday.
"Predatory pricing by competitors will likely force price leaders like Infosys to also lower pricing. In this backdrop, we do not see a structural upward re-set of margins for the industry even if the rupee were to remain steady at current levels," its analysts Nimish Joshi and Arati Mishra wrote. CLSA expects Infosys to sustain its 29.5% margin despite losing its 10-15% pricing premium.
The brokerage expects Infosys, which has a higher proportion of revenues from the US than rivals, to gain more because of a weak rupee. It elevated Infosys to 'outperform' from 'hold.'
Cognizant, which will announce its December quarter earnings during the first week of February, has proven to be among the more nimble-footed, along with TCS. The US-based company, which has a policy of reinvesting margins in excess of 20%, is expected to easily meet its forecast of 3.7% revenue growth for the December quarter.
While on the one hand IT services companies will use the extra firepower from a weak rupee to win new orders, clients will also be bargaining harder.
rupee plays White Knight for Indian technology companies
