'Strong rupee may hit projections of IT companies'

T Surendar / TNN / Apr 6, 2007, 00:30 IST

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For FY08, if equity analysts are to be believed, Infosys is expected to offer a guidance for lower sales and profit growth targets.

'Strong rupee may hit projections of IT companies'

MUMBAI: Every year, Infosys' guidance for the current year's revenue and profit estimates often sets the tone for expectations from the fast growing software industry.
But for FY08, if equity analysts are to be believed, Infosys is expected to offer a guidance for lower sales and profit growth targets.
Ahead of Infosys annual results and guidance announcement on Friday, April 13, a broking firm, DSP Merill Lynch has argued in its latest report that investors should sell the stock in the short term.
The situation was not as bleak even three months ago when TCS and Infosys announced better than expected results for Q3 ended December 31, 2006.

Despite the rupee appreciating in that quarter, IT companies posted better results as they were able to extract better prices for their contracts with customers.
Analysts now argue that the situation has reversed. A bleak economic outlook for the US coupled with the appreciating rupee have cast doubts on the short term outlook for the business.
Says Emkay Stock and Share Brokers Ajay Parmar: "The market fundamentals have changed significantly in the recent past. Though there are multiple margin levers, the areas of concerns have also increased."

Despite the rupee appreciating significantly towards the close of the financial year in March, analysts expect that most companies will end their current financial year more or less in line with market expectations. The worry, however, is about the future.
DSP Merill Lynch says that the risk posed by uncertain US economic outlook, rupee appreciation and client specific risks would put Infosys EPS growth guidance in the early 20s as against a consensus forecast of 30% for FY08.
The report says that in the past, as in 2001 and 2003, the stock reacts strongly to a disappointing guidance.
An IT sector result preview report by Edelweiss says that their discussion with tier-1 players in the IT industry suggest that the strong growth momentum will continue through FY08 as well.
However, Edelweiss expects that the rupee's sharp appreciation will negatively impact the guidance for FY08, as most companies either use the closing rate of the previous quarter or the past two week's average rate for guidance in rupee terms.
On industry's part, Wipro chairman Azim Premji maintained that currency appreciation would not hit software exports from India, since the industry had already anticipated it.
"The Indian currency is relatively strong and this (its strengthening) was not unanticipated. We will have to drive productivity and get better prices. We have planned for currency rates of Rs 43.50 or so. One must ask for better prices and give more value to justify the higher prices,"Premji said.
In the last one year, the BSE IT index has underperformed the sensex by 2%. Among the large IT stocks, TCS outperformed the market by close to 10% while stocks like Infosys and Satyam lagged the sensex.
The underperformance of IT stocks vis-a-vis the sensex crept in since January on the back of news that the US economy is slowing down and growing defaults in the American home mortgage market.
"Now, if Infosys announces a pessimistic guidance, IT stocks prices may well head southwards before they correct again."

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