IT firms’ Q4 profit seen lower

Indian IT companies are likely to post lower profit as they continue to battle pricing pressure.

Indian mid-cap IT companies are likely to post mostly lower profit in the quarter ending March as they continue to battle pricing pressure and declining volumes amid a slowing world economy.

Rolta India may report a profit drop of 30 per cent at 463 million rupees and Hexaware Technologies may post a 44 per cent fall in profit to 97.5 million rupees from a year ago,according to analysts estimates.

“Anecdotal evidence and management commentary suggests that in some contracts,vendors have had to eat humble pie and take substantial pricing cuts of 10-15 per cent,” Harit Shah of Angel Broking said in a note.

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A world-wide credit crunch,which has led to recession in US,some European nations and Japan,has forced companies to cut technology spend or demand lower rates,hurting profits of the Indian software firms,which as a sector derive about 80 per cent of their revenue from exports.

Angel Broking’s Shah estimates that IT companies would have offered 1-3 per cent lower pricing in the March quarter,compared with the three months ended December.

Software firms are currently coping with the stress by cutting pay as well as jobs,but Shah says the pricing pressure will intensify in the future,squeezing margins further.

However,”the pricing pressure and volume decline is likely to more than offset any benefits due to layoffs and the currency buffer,” said a note from IIFL,the institutional research division of India Infoline.

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In January-March,the Indian rupee fell 4.1 per cent against the dollar,which is seen boosting revenue for the export-driven Indian software industry.

However,the dollar’s 2.1 per cent rise against the pound sterling,another key currency for the Indian firms,will hurt the sector’s dollar earnings,analysts cautioned.

Mastek will kick off the earnings season for the sector by reporting results on Thursday,followed a week later by bellwether Infosys Technologies,which reports on April 15.

IT BUDGETS ON RADAR

Management commentary on their clients budgets will be eyed keenly during earnings announcements to gauge the overall demand scenario,analysts said.

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“Though the budgets could provide some indication on overall demand for IT spend,a cash conservation attitude and CFO-led decision making would call for a relook at budgets going forward,” brokerage Motilal Oswal said in a note.

Clients were looking at budget cuts of 10-15 per cent for calendar year 2009,the brokerage added.

Turmoil in the financial sector,a major customer for Indian IT firms,has seen local firms struggling to retain business,pushing them to take several cost-cutting measures.

Last month,Hexaware Technologies said it will bench 350 employees,paying them half their basic salary,and will also effect a 2-10 per cent pay cut for employees above certain levels.

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In February,Mastek benched about 425 people,giving them the option of either leaving immediately with compensation or staying for not more than one year on a monthly allowance.

However,Tech Mahindra which reported a loss last year is seen posting a 2.06 billion-rupee profit,while MindTree may report a 3.7 per cent increase in profit to 369 million rupees,analyst estimates show.