* WHAT: Mid-cap IT companies' April-June earnings
* WHEN: Starting July 20
* Demand steady, but wages squeeze margins, profits
* Tax holiday withdrawal hurts
By Manasi Phadke
MUMBAI, July 15 Indian mid-cap IT companies are
likely to see a modest revenue growth in April-June on stable
demand, but most would see profits and margins squeezed by wage
hikes and higher taxes.
The June quarter is typically stable for software services
firms after a seasonally weak Jan-March, when clients finalise
budgets for the next fiscal year, leading to a spurt in spending
in the next two quarters.
"Tier-two IT companies are expected to report 2-6 percent
volume growth," brokerage Prabhudas Lilladher said in a report.
"We expect margin of tier-two Indian IT services companies to
witness sharp erosion."
Companies could see margins slipping sequentially as most
raised wages by an average of 12 percent for offshore employees
and about 2.5-3 percent for onshore employees.
Margins would drop 50-200 basis points on a sequential
basis, said Angel Broking analyst Srishti Anand.
"For mid-tier companies across the board, we are seeing
selling, general and administrative costs as a huge margin
lever, so year-on-year if you go to see, margin movement for
mid-tier companies would be upward."
A spurt in tax rates due to expiry of the Software
Technology Parks of India (STPI) scheme will also hurt margins
and crimp profits compared with a year ago.
Small and mid-cap IT firms would especially see a dent as
many are yet to migrate to special economic zones to continue
enjoying some sort of tax benefits.
Tax rates would rise to 25-27 percent from 12-16 percent
earlier and the impact on profit margins would be huge, said
Vimal Gohil, analyst, Asit C. Mehta Investment Intermediates.
"The increase in tax rates would have an additional 6-7
percent dent on profits," said Gohil.
STPI scheme was started in 1991 to boost software exports.
Among other benefits, it provided a 10-year income tax exemption
for units situated in software technology parks.
A Reuters poll of 16 brokerages estimates profits of Patni
Computer Systems , MphasiS and Infotech
Enterprises to continue to decline in double digits,
while Mastek would stay in the red. For poll, click on
HCL Technologies and MindTree's profits
are likely to rise in double digits, while profits at KPIT
Cummins and Rolta India would inch up
Hexaware Technologies will, once again, see a more
than three-fold rise, helped by strong enterprise resource
planning business growth.
"Amongst mid-tier companies, we expect Hexaware to continue
its good show as we build in flat margins quarter-on-quarter at
14.3 percent despite impact from salary revisions during the
quarter," Emkay Global said in a report.
Hexaware's stock has shot up 25.3 percent so far this year,
while the IT index has fallen 15.6 percent
Earlier this week, India's No. 2 software services exporter
Infosys Ltd reported a lower-than-expected profit of
17.22 billion rupees, and warned it faces a volatile global
The country's top IT services provier Tata Consultance
Services , however, dispelled fears of a growth slowdown
with its 28 percent increase in net profit.
"The inherent strength reflected in TCS' first-quarter
earnings suggest that the weaker numbers reported by Infosys
could be company-specific and related to the ongoing
restructuring," UBS said in a report.
The National Association of Software & Services Companies
(NASSCOM) has forecast software and services exports to increase
16-18 percent in FY12 due to robust demand for outsourcing from
(Reporting by Manasi Phadke; Editing by Rajesh Pandathil)