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Analysts differ on operating profit margin trends

Our Bureau

"We expect the OPMs to stabilise and close at the current levels for the financial year 2003," said Mr Bhupinder Ahuja, software analyst at Deutsche Securities, in his latest report.

BANGALORE, Aug. 5

EVEN as the prices seem to have bottomed out for IT services companies, which in turn have stepped up hiring, there are conflicting views on the operating margin trends.

While some analysts feel that the operating profit margins (OPMs) have also bottomed out and could only head northwards, backed by stable prices and severe cost cuts, others argue increasing headcounts and strapped utilisation rates could continue to be a drag.

"We expect the OPMs to stabilise and close at the current levels for the financial year 2003," said Mr Bhupinder Ahuja, software analyst at Deutsche Securities in his latest report.

"We are unlikely to see any further sharp declines beyond what we have witnessed over the last year. The key reason for this is the stabilisation in pricing and the impact of rate renegotiations by clients already being built into the margins. While we do expect sales and marketing expenses to be on the rise as these companies expand their service offerings and compete with global majors, we believe much of this will be compensated for by the drop in administrative expenses due to cost control measures being taken by these companies," he said adding that the depreciation of the dollar versus the rupee remains a risk.

However, several analysts from top domestic brokerages said that general and administration costs are not likely to stay capped with new surge in hiring and costs are likely to increase proportionately as most of the new-recruits become billable.

"Moreover, there is almost a quarter's lag in new recruits to become billable and this might restrict any near-term upside in the operating margins as utilisation level stays flat,'' a technology analyst with a top domestic brokerage said.

Companies such as Infosys reported a much smaller 0.6 per cent pricing decline in the first quarter of the financial year 2003, which reflected that price decline has been arrested. Managements of several top companies had indicated in their post- earnings calls that the worst for pricing was behind them.

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Analysts differ on operating profit margin trends


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