Featured Job: IT Recruiter for Inventcorp, Hyderabad
News »Browse Articles » IT industry passes through turbulent times
0
Vote Vote

IT industry passes through turbulent times

Views 1 Views    Comments 0 Comments    Share Share    Posted 01-12-2008  
1 Dec 2008:

The Domestic information technology (IT) sector is passing through turbulent times. A slowdown in the US and Europe, which account for more than three-fourths of the industry revenue, has had a negative impact on the growth prospects of companies in the sector.

A tough macro-economic environment is usually difficult for mid- and small- sized companies, as they usually have less room to manoeuvre. However, an analysis of September quarter (Q2) results reveals that the turmoil has not affected mid- and small-sized IT companies as much as it was expected to.

The aggregate Q2 net sales of the sector increased by 11% compared to the previous quarter. In fact, this is the highest growth rate for mid- and small-sized IT companies in the past seven quarters. This is also comparable to topline growth rates reported by many tier-1 players. For instance, Infosys, the bellwether in the IT sector, reported a growth of 11.6% in its rupee revenue, while Tata Consultancy Services (TCS) reported 9.3% growth in topline.

Another important point to note is that many mid and small-sized IT companies don’t hedge their export revenues to a large extent. The sudden U-turn in the exchange rate movement, lower hedged positions and depreciation in the rupee helped mid- and small-sized companies to benefit from the fall in the rupee, and also pushed up their revenues and earnings in rupee terms.

The rupee depreciated by a little more than 9% during the quarter ended September ’08. For the purpose of this
analysis, we have considered those IT companies which have reported trailing 12-month (TTM) net sales between Rs 100 crore and Rs 1,000 crore.

The operating profit of small- and mid-sized IT companies grew at a rate of 17.7% compared to the previous quarter. There are a number of factors — foreign exchange losses/gains, employee expense and other expenses — which led to such an impressive growth in operating profit.

For companies like MindTree, the foreign exchange loss on account of derivatives instruments was Rs 33 crore in September ’08 quarter, compared to Rs 54 crore reported during the previous quarter. This improved its bottomline significantly and the company, which recorded a loss in Q1, reported a net profit of Rs 37 crore in Q2.

However, the predominant reason for improvement in operating efficiency was the decline or flat growth in other
expenses.

A number of players like Firstsource Solutions, 3i Infotech, NIIT Tech and Spanco reported decline in other expenses , which account for more than 30% of the total operating cost for many mid- and small-sized companies. For instance, 3i Infotech witnessed a growth of a little more than 30% in its operating profit. At the same time, it reported more than 20% decline in other expenses.

Such a decline in other expenses is a result of the companies’ effort to cut down costs in different areas like travelling, training and other allied services during a slowdown.

Considering the current market conditions and the feedback from the management of various companies, we think this particular factor (other expenses) will further come down as a proportion of the total operating expenses.

Further, the decline in interest expenses boosted bottomlines of companies. Interest cost in Q2 declined by 33% compared to the previous quarter. Despite this, net profit did not keep pace with the operating profit.

In Q2, the net profit grew by around 12% compared to the June ’08 quarter. This was because of a significant fall in other income, which declined by 44% compared to the previous quarter. The fall in the equity market and subsequent impact on investment income of companies were the main reasons for the decline in net profit.

Going forward, the December quarter may be more challenging in terms of business growth, but further depreciation in the rupee will offset it to some extent.

Source:
http://economictimes.indiatimes.com/Features/Investors_Guide/IT_industry_passes_
0
Vote  Vote
Enter your comment:
No Comments For This News

Search News

What's the News?

Post a link to something interesting from another site, or submit your own original writing for the Recruitment community to read.

Most Popular News

Most Recent User Submitted News