IT Sector bounces back ,Year 2006 & 2007

Ready for IT's action-packed performance


VIDHIKA SEHGAL


TIMES NEWS NETWORK[ MONDAY, MAY 01, 2006 12:00:19 AM]


If FY06 was a great year for the IT sector, then gear up for an even better performance in FY07. With global IT spending likely to be buoyant especially from the European region, companies have projected a topline growth of another 30-32% in FY07.


In addition to a favourable macro environment, an upward bias in pricing in some of the newer services such as package implementation, systems integration, IT consulting etc, where global IT demand is increasing, will also add to the growth potential. However, certain downside risks relating to heavy rupee volatility and rising compensation costs have to be borne in mind.


Average consolidated revenue growth of Infosys, Wipro, Satyam and TCS for FY06 was 33%. The topline growth of the major IT companies was more than the guidance given at the beginning of FY06.


The enthusiasm surrounding the IT industry is highlighted in the stock market, where the share prices of the big four rose by an average of 40% between March 31, ’05 and March 31, ’06.


The recent surge in stock prices is in consonance with the strong fundamentals of the sector. Given the high growth momentum and a positive guidance by companies, the party is expected to continue in FY07 as well.


While revenues are expected to be buoyant for the whole year, the first quarter results may be a bit muted largely because of upward salary revisions and hiring costs. Both offshore and onsite salary hikes are expected in Q1 this year.


Expected wage inflation is 12-15% in India and 3-5% overseas. Last year saw an increase of 56,000 in the employee numbers of these four companies, which was one of the highest expansions in the past six years.


All four companies are entering the new financial year with even larger plans of expansion in the employee base. If FY07 expansion numbers are to be believed, then this year will easily see an addition of 70,000 employees.


Hence, higher personnel costs along with hiring costs are likely to put greater pressure on margins, especially in the first half of the year.


While topline growth has been stable, margins have remained under considerable pressure throughout FY06. However, in the medium to long run, all major software companies expect margins to be sustained and even improve slightly.


Broadly, there are certain leverages such as an improvement in the offshore-onshore mix, uptick in utilisation, enhanced productivity and improved billing rates that could stabilise margins.


At the same time, however, considerable uncertainties still remain which need to be factored in. The heavy exchange rate volatility, for instance, was the primary cause of a dip in the margins last year.


In the fourth quarter, the impact of rupee-dollar movement at the operating level was 1.3% in the case of Infosys and TCS. The guidance for this year has been given, assuming the rupee remains stable at 43.5-45 to a dollar. A great deal will, therefore depend on whether the rupee remains within this range.


In an environment of high compensation cost and rupee volatility, a lot will also depend on the bargaining power of the software majors in increasing the pricing levels, along with a well-diversified portfolio base to cater to the growing global demand in new services.


The Q4 growth was largely based on volumes. In FY07 it is expected that there could be a slight uptick in pricing. While this could give a big boost to the topline growth, other external factors are also at play.


Geographically, for instance, the European region is fast catching up with the US in outsourcing some services. Many of the big-ticket IT deals last year came from this region and its share in the revenue mix of the Indian IT majors is likely to grow further this year.
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