India's flourishing software firms should report robust quarterly profits as they win large outsourcing deals from Western clients, but a stronger rupee ate into margins in October-December, analysts said.
Earnings for top firms that are grabbing more outsourcing contracts as U.S. and European companies look to cut costs rose by about a third in the December quarter from a year earlier, according to a Reuters poll of 10 brokerages.
"Volume growth remained strong in the quarter. Top companies will be able to exceed their guidance," said Harmendra Gandhi, vice president of research at Mumbai brokerage BRICS Securities.
"(But) topline growth may see some slowdown compared to the previous quarter due to the rupee appreciation and lesser number of working days in the holiday season." The rupee rose almost 4 percent against the U.S. dollar in October-December, slowing revenue growth in a $23 billion software and back-office services exports industry that earns nearly 60 percent of its business from U.S. clients.
Mid-sized i-GATE Global Solutions Ltd. kicks off the sector's earnings season on Wednesday, but the market's focus is more on results due on Thursday from Infosys Technologies Ltd., India's No.2 software services exporter.
Infosys, the first Indian firm to join the Nasdaq 100 index, is forecast to post a 51 percent jump in fiscal third-quarter net profit to 9.79 billion rupees, the Reuters poll showed.
The IT sector stock index rose 20 percent in the December quarter, almost double the main Mumbai index's gain, after the four leading software services firms beat market forecasts with July-September profit growth of 35-53 percent. VARYING MARGINS
Analysts said margins in most of the top software firms were steady in October-December, with higher billing rates and the transfer of more business to low-cost Indian facilities offset by a stronger rupee.
Select services companies like Wipro Ltd., the third-largest exporter, may show a slight dip in margins as it hiked wages for some staff, brokerage ICICI Securities said.
Although skilled workers in India are paid substantially less than in the United States and Europe, wages are rising 12-15 percent a year, compared to 2-6 percent in the West, as companies try to retain ambitious staff.
Networth Stock Broking said large as well as mid-tier software services companies won significant outsourcing deals in the quarter, often beating off bigger overseas rivals.
In December, telecoms software firm Tech Mahindra Ltd. said it signed a five-year contract with British telecoms group BT that was expected to generate revenue of more than $1 billion over the period.
Tata Consultancy Services Ltd., India's top software exporter, and fourth-ranked Satyam Computer Services Ltd. said in November that a new order from Qantas Airways Ltd. was worth about US$145 million over seven years.
The software and back-office industry, which earns 90 percent of its revenue from overseas clients, expects exports to rise 27-30 percent to $29-$31 billion in the year to end-March.