Q4 scenario

Year-on-year (y-o-y). Both income and net profit (cumulative) of the five IT companies that have declared their Q4 results so far have come down. If you compare Q3 results with those of Q4, y-o-y income growth has declined by nearly 17 percentage points. Net profit has plunged 5.8 percentage points over the same period.

Market bellwether Infosys Technologies posted a respectable growth of 24.5 per cent in income (y-o-y) and 32.7 per cent in net profit in the March FY09 quarter. Net profit margin and operating profit margin too did not fall significantly, given the bleak environment, and stood at 21.3 per cent and 29.1 per cent respectively.

The rupee depreciated by almost 4.6 per cent vis-à-vis the dollar during the January-March period. This decline failed to cushion the impact of declining revenue during Q4.

Quarter-on-quarter (q-o-q). If you make q-o-q comparisons, the impact of the slowdown in Q4 comes across even more starkly — it has been much more than in the previous quarters. Q-o-q income and net profit fell (-)5.3 per cent and (-)4.2 per cent respectively from December to March.

While poor, these results did not come as a surprise to the markets and were by and large in line with expectations.

Why the poor results. The Indian IT sector to a large extent depends on the banking and financial services industry (BFSI) in the US. Unfortunately, this is the sector that is at the epicentre of the current crisis. As these companies have cut down on their IT expenditure, India’s leading IT service providers were bound to be affected. Moreover, the crisis has now engulfed other sectors as well. As Deepak Purswani, research analyst, Sharekhan, says: “The demand environment remained challenging in this quarter.”

Last time, when the dotcom bust happened, IT companies tried to diversify their client base to Europe and other developed nations (to reduce their dependence on the US). During the current crisis, even that strategy has come to nought as the economic problems emanating from the US have now engulfed the entire developed world. One saving grace has been the depreciation of the rupee. “In previous quarters, the depreciation of the rupee provided some cushion to IT companies,” adds Purswani.

Past quarters

For the same set of the companies, in Q1 PBDIT grew by a meagre 0.19 per cent (y-o-y basis) while net profit showed a negative growth of 5.1 per cent. Explaining this Purswani says: “Companies such as Wipro and TCS go in for wage hikes in Q1. This led to such a fall in profits.” The situation improved somewhat in Q2 and Q3, with income and net profit growing y-on-y by 26 per cent in both quarters. Y-on-y net profit inched up 1.8 percentage points from 12.3 per cent in Q2 to 14.2 per cent in Q3. However, on a q-o-q basis, income and net profit declined significantly by 590 basis points and 1,390 basis points respectively (from Q1 to Q2 and from Q2 to Q3). (See table).

Challenges ahead

Pricing continues to be a major headwind for the sector due to the bad global economic environment. According to G Shyam Sundar, vice president, CIL Securities, “Slowdown in the West is taking a toll on this sector. The IT budgets of companies, which have already started to go down, are expected to decline further.”

The rupee depreciated around 27.4 per cent in FY09. “In future currency volatility could be a cause for concern,” says Purswani.

As for the future, Sundar says: “Margins of frontline companies are expected to decline.” Adds Purswani, “The major cost of IT companies is wages. These companies won’t go in for wage hikes and will try to cut down their selling, general and administrative expenses.”

Outlook

A meaningful improvement in the prospects of this sector is not expected until a recovery comes about in the West. “The IT sector is expected to struggle for a couple of quarters. Thereafter, some stability can be expected. A few big players are expected to do well in the coming quarters due to their diversified business models. Specific mid-cap companies may do well due to their expertise in areas such as engineering. Recovery is expected in a year’s time or more,” points out Sundar. Purswani, too, believes that post Q2FY10 some stability may come about in IT, depending on how the macro-economic environment pans out.

niti.kiran@expressindia.com