India IT Biggies to Post Top-Dollar Sales

Top 4 cos expected to report sequential growth of 4-6% in dollar-denominated revenues

SHRUTI SHARMA & RANJIT SHINDE BANGALORE |MUMBAI 

The top four listed IT companies are expected to report sequential growth of 4-6% in dollar-denominated revenues during the quarter ended June 30, 2011, better than the lukewarm growth of 2-4% in the previous quarter, as demand stays strong in the key markets of Europe and North America. 
The profitability of some companies, including TCS and Infosys, the two largest IT players, could face marginal pressure due to wage hikes, but overall profitability of the sample group of companies is expected to remain intact with some marginal improvement expected from Wipro, as per estimates by ET Intelligence Group. TCS, India's largest software company, and Shiv Nadar-controlled HCL Technologies, the fifth largest, are likely to be the biggest beneficiaries of the IT outsourcing demand. According to ETIG estimates, investors can expect a 5-7% sequential topline growth from these companies during the June quarter. 
Infosys and Wipro, the secondand third-largest IT companies, are likely to experience higher revenue growth than the previous quarter, but may continue to lag behind their peers. 
Infosys, which will kick off the first-quarter results season when it declares its numbers on July 12, is expected to beat the upper end of its guidance. The company has guided for sequential revenue growth between 2.6% and 3.6% in dollar terms. But the average of the estimates of seven brokerages is higher. They predict a 4-5% revenue growth in the June quarter. Wipro may Beat Guidance 
The company is expected to raise its full-year dollar-denominated revenue guidance from 18-20% by 50 basis points. 
TCS is expected to reap the benefits of strong demand, especially in the BFSI segment, with around 6-7% sequential growth while HCL Technologies is likely to clock a similar growth backed by benefit from strong infrastructure spending to see a quarter-on-quarter revenue growth of 6-7% in dollar terms. 
Wipro is expected to beat the upper end of its guidance with a sequential revenue growth of 2-2.5% in dollar terms. Investors would also be keen to gauge the future demand scenario in the backdrop of the uncertainty hanging over the world economy in the wake of the Greece debt crisis, and an apparent weakening of US growth. 
In a report that was widely reported, brokerage firm CLSA spoke of a deceleration in new contracts. The report, which was issued last month, expressed concerns over the growth momentum of top IT players after taking into account the delay in economic recovery in the US and Europe, the major markets for Indian IT companies. These markets contribute over three-fourths of India's IT exports. 
Other industry analysts reckon that demand is likely to remain firm despite the macroeconomic woes of the West. Last week, research firm Gartner said it expects global spendon IT services to grow by 6.6% in 2011, more than twice as fast as in 2010. The firm had earlier predicted 5.6% growth for 2011. 
The views on future demand among sector players are mixed, though. Infosys CEO and MD S Gopalakrishnan was cautious while speaking to ET early last month on discouraging economic data from the West, "The business environment remains volatile with decisions being delayed or postponed frequently. This may impact the IT services business broadly, or by industry, or by customer," he had said. 
But is appears to be business as usual for Wipro. "We haven't heard any concerns during our discussions with customers so far. We also expect sustained demand for our services and continued growth momentum in the coming few quarters," CEO TK Kurien had told ET before the company's silent period. TCS also reiterated its stance of sustained client funding and smooth project ramp-ups in an investor communiqué in June. 
Attrition is likely to remain high for most companies as most of the movement happens during this quarter and employees also leave for further studies. The top four players are trading at P/Es of 18-25 of their FY12 estimated earnings. This fully takes into account the expectations of sustained demand recovery in the quarters to come. Therefore, the valuations of top players are likely to remain range-bound until a major trigger in terms of escalated volume growth coupled with higher billing rates.