Weak Re may power IT cos’ Q4 show

A WEAK rupee, which has depreciated more than 10% against the dollar since last October, may save the $50-billion IT services industry's blushes as it gears up to announce fourth-quarter results, but slowing topline growth remains a cause of concern in the long run.
    The companies are sparing no effort to ride out of the tight situation — a result of high exposures to the recession-hit US market and the troubled financial services sector. They hope better use of their employees, longer working hours and salary freezes will help them improve margins.
    While margins may remain stable due to some productivity gains and a depreciating rupee, the coming fiscal could well be the weakest that the IT industry has seen in over a decade. Companies find new business hard to come by in a tough market. With software industry body, Nasscom, cutting growth forecast to 17% for this year from its earlier projection of 21-24%, they find little to cheer about.
    With new technology spends on hold, companies are adopting a wait-and-watch approach, while closely monitoring costs. "Given the market conditions, growth will be under pressure. Revenue growth and volume growth will be hit," said Amit Singh, executive director & head of IT services practice, Avendus Advisors, an investment bank.
    According to Goldman Sachs, concerns about limited visibility, increased pricing pressure, industry exposure to the US (60-70% of total revenues) and financial services sector (around 35% of revenues) will linger. Re impact depends on IT cos' hedging strategy
"WE view CY2009 outlook (10%-plus revenue growth year-on-year) as consistent with our cautious coverage," said a Goldman Sachs analyst.
    The rupee's fall does have a positive impact on margins, with every 1% depreciation improving margins by 40-50 basis points. "Yet, some of this improvement has been neutralised by the forex losses that IT companies have incurred," says Harit Shah, research analyst at Angel Broking.
    Much will depend on how companies have hedged. About a year ago, when the rupee was strengthening, companies locked contracts at Rs 42-43 to a dollar. Now, with the rupee dropping to around Rs 49 to a dollar this quarter, a lot depends on how companies had placed their bets. "Most companies lock in a sizeable part of their receivables, up to 80% at times, at a particular rupee-dollar rate for 12-18 months. In that sense there may not be too much to gain for companies except in new contracts," said Suvojoy Sengupta, partner at consultancy firm Booz & Co.
    While the rupee fell against the dollar, it gained against the pound and euro. A lot will depend on how CFOs managed their currency basket, Mr Sengupta said. During this quarter, the rupee has stayed above Rs 49 against the dollar.
    Companies such as TCS have increased working hours by at least five hours per week and the employee use across the industry has increased by 3-6%.
    "Companies have several levers for margin improvement and this will be seen in the quarter results. They are signing new contracts at levels 10-12% lower compared to previous quarters. This loss is being compensated by higher use of the bench, cut in wages and rupee fall," said Avinash Vashishtha, CEO of Tholons, a Bangalore-based advisory firm.
    Companies are looking at new growth areas such as consulting and high-value services, while waiting for demand to pick up. "We stay 'market underweight' on the IT sector, as we do not see any catalysts on the horizon, while keeping in mind the downside risks," said Viju George, research analyst at Edelweiss Securities.
    For companies, this could mean a faster shift to high-end services, lest they are left with only lowmargin business, making survival a challenge in the long run.