India's top software services companies are set to report modest rises in profits compared with the boom times of recent years as a sluggish US economy crimps outsourcing deals, and the sector's growth is set to slow further.
Investors will focus on new orders, pricing and hiring plans as the export-driven industry battles a fall in profit growth on growing evidence of a recession in the United States. Helped by an army of English-speaking workers and cheaper wages, India's estimated $64 billion software services sector has thrived by winning deals from overseas clients, with the US accounting for more than half of the sector's revenue.
"US economic recession concerns are likely to lead to worsening business prospects for the Indian IT sector," Harit Shah, analyst at Angel Broking, said in a report.
"This is leading to continued negative sentiment for IT stocks. We believe that in the medium-term at least, this is unlikely to change."
Indian software companies provide an array of services from software coding to managing computer networks and call centre operations and processing financial transactions.
On Tuesday, No. 2 software exporter Infosys Technologies is forecast to report a Jan-March quarterly net profit of Rs 12.6 billion ($316 million), up 10.4 per cent from a year ago and 2.6 per cent from the December quarter.
Third-ranked Wipro is forecast to post a 2.2 per cent rise in profit from a year ago, as wage hikes during the quarter hit margins, and sector leader Tata Consultancy Services is seen posting a rise of 17.2 per cent.
Kotak Securities said the earnings outlook for Nasdaq-listed Infosys would determine the performance of software stocks in the medium term.Citi expected Infosys to forecast revenue growth of about 20 percent in dollar terms for the fiscal year to March 31, 2009.
For the just-ended 2007/08 year, Infosys has said it expected revenue to increase by 35-35.2 per cent in dollar terms, Tata Consultancy said last month that two of its 15 biggest clients had delayed some projects during the quarter.
Indian software exporters get the bulk of their revenue from banks and financial firms, sectors which have been battered by the turmoil in global financial markets.
"We expect this phenomenon to spread further to the companies that have stayed untouched until now if the economic situation amongst the US corporates continues to worsen," Emkay Share and Stock Brokers said in a report. The sector counts General Electric, ABN AMRO, Qantas Airways, Goldman Sachs, and Credit Suisse among its key clients.
Indian firms are eyeing deals in emerging markets to cut dependance on the US but analysts see no quick change in their revenue stream as compared with rivals such as Accenture, which gets 60 per cent of its revenue from outside.
The US Motilal Oswal Securities said services firms would be under "immense pricing pressure", particularly from the banking and financial institutions clients, during the current fiscal year.
The rupee weakened by 1.7 per cent against the dollar in the March quarter, offering some respite to software companies after the currency rose more than 12 per cent in calendar 2007.
Angel Broking said the weaker rupee would boost the margins of top software firms by 95-190 basis points in the March quarter over the December quarter. Shares in Infosys and Wipro fell 19 percent in the March quarter and Tata Consultancy dropped more than 25 percent.
The software services sector index shed 22 per cent, in line with a fall in the broader benchmark index. "We believe that we could witness more weakness before the tide turns for the Indian IT services pack," Emkay said.