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Tuesday, Oct 08, 2002

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Software co results to offer mixed fare

Neha Kapoor

MUMBAI, Oct. 7

STARTING this week, the results season is likely to throw up a mixed bag as far as the software sector is concerned with individual stories standing out more than any single sector-specific trend, say industry watchers.

For the September-ended quarter, there are some companies that seem to be favourites in terms of a `strong to meet expectations' performance and others that have been marked out as `most likely to disappoint.'

While Infosys Technologies, along with second rungs such as i-flex, Mastek and Hexaware, has been slotted in the first category, companies such as Satyam, Hughes Software and HCL Tech are being looked upon with a fair amount of trepidation.

A CLSA Emerging Markets report (dated October 3, 2002) on the expected quarterly performance of the software sectors says, "Optimism is focused on Infosys, where we expect stable rates, strong volume growth and a potential upgrade in the financial year 2003 guidance. Shift of onsite project starts to offshore holds potential for a quarter-on-quarter (QoQ) improvement in margins. Wipro faces a balancing act between strong growth in enterprise and sluggishness in telecom — overall we expect it to meet its second quarter revenue guidance.

"Negative surprises could come from Satyam (non-operating income at risk from reappreciation), Digital (slowdown in HP's business and continuing uncertainty on HPISO merger) and Hughes (no let-up in telecom slowdown)."

Says an equity analyst with a local brokerage firm, "Overall, it's going to be a mixed fare — there will be some companies that will do exceedingly well and others that will clearly disappoint. However, there are three points to look out for during the quarterly announcements; billing rates, utilisation rates and recruitment, and rupee appreciation.

``Though there will be a general easing of pressure on billing rates especially on the off-shoring contracts, the same cannot be said on the larger, volume-generating contracts. Hence, reported billing rates will continue to see a decline. The recruitment and utilisation matrix should be observed — utilisation has reached its peak for companies such as Infosys and Wipro, sending them back into market and reflecting a certain visibility in terms of business traction.

``However, this does not hold for companies such as Satyam. Also, some surprises here are Mastek and Hexaware, which are getting a fair amount of business. And, the third essential parameter is the appreciation of the rupee against the dollar and its impact on margins."

The CLSA report adds that strong volume growth and tapering rate declines would be the dominating theme of second quarter results from Indian software companies with performance varying significantly across companies as the competitive advantage shifts to large, established and well-diversified (by industries, clients) players.

"We expect 5 per cent quarter-on-quarter (QoQ) revenue growth (19-20 per cent Year-on-Year), flattish margins and 1.6 per cent (QoQ) net profit growth for our software universe. However, on a Year-on-Year basis, the base effect of rate declines and lower margins will ensure a flat to negative and Year-on-Year growth in pre-exceptional net profits."

On the appreciation of the rupee, the report says, "the rupee has appreciated 0.7 per cent QoQ in the second quarter of the financial year 2003, only the second instance in the last 14 quarters. This would impact non-operating income bookings, but Satyam and Wipro are most at risk given that they have 70-90 per cent of their cash parked in US dollar deposits and, therefore, exposed to translation losses. The immediate EBITDA level impact could be hedged via forward contracts."

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