Is it tough times ahead for Indian IT firms?

Major information technology firms are expected to post a decline in revenue growth in the fourth quarter of 2008-09, primarily on account of project cancellations, say analysts.

"Indian vendors have witnessed several project cancellations during the third and fourth quarter of the fiscal year 2009. The magnitude of project cancellations is different for different vendors," domestic brokerage firm Motilal Oswal said in its India strategy report.

Along with project cancellations, delays in client decision making will cast a toll on 4Q FY-09 volumes, it said. "We expect IT companies to report quarter-on-quarter dollar revenue declines owing to stressed volumes and declining realisations. This is the second consecutive quarter where the sector will see dollar revenue degrowth," it said.

The rupee has depreciated 4.69 per cent against the US dollar during the March quarter, while on an year-on-year basis it has depreciated over 27 per cent.

"Hence, the top-line growth even in rupee terms is expected to remain flat to marginally negative on an organic basis during the quarter," brokerage firm Sharekhan said in its IT earnings preview. Meanwhile, the appreciation of the dollar against other international currencies (euro and pound sterling) would impact the dollar term revenues of the front-line IT firms.

"This is likely to have a negative impact of 2-3 per cent on the dollar term revenue growth rate as the IT companies bill around 25-30 per cent of their revenues in the pound sterling, the euro and Australian dollar," it added.

IT major Infosys would kick-start the quarterly earnings season from April 15 followed by other IT majors -- Wipro, HCL Technologies and Tata Consultancy Services.

"Forward earnings for most companies are not expected to be good. The earnings for the entire IT sector are expected to be bad and the Infosys results are likely to give a new direction to the market," Arun Kejriwal of Kejriwal Research and Investment Services said.

The Sharekhan report stated that amid global turmoil and uncertainty, investor focus would remain on FY-10 guidance. "Going forward, the street would be keenly watching the guidance for FY 2010 as the same would influence the sentiments towards the IT stocks. In rupee terms, the street expects a guidance of a flattish growth in revenues," it noted.

"The street is expecting a revenue growth of 3-4 per cent in rupee terms in FY-10 despite a five per cent y-o-y decline in dollar terms," Sharekhan added. During the January-March period, Infosys scrip has gained 15.38 per cent to Rs 1,324.10 and TCS was up 9 per cent.

While shares of Wipro fell one per cent since January 1, HCL Technologies was up 17 per cent at the end of March 31. "Technology stocks are likely to underperform the markets over the next few quarters," Sharekhan said.

According to Motilal Oswal following substantial across-the-board price cuts, IT companies are hopeful of restricting price cuts to five per cent in the March quarter. Besides, focus on off-shoring would improve the impact from declining realisations.

"We expect growth to start picking up from second half of FY-10, as clients begin to adopt off-shoring to cut costs. As the freeze in technology spending begins to lift, we believe large players would start booking volume growth," Motilal Oswal added.

The Sharekhan report stated that in terms of earnings, Infosys is likely to meet the lower end of its dollar guidance.

Besides, HCL Technologies is likely to report a revenue growth on the back of acquisition of British consultancy firm Axon, which would cast its toll on the operating profit margin of HCL.

Agencies