Midcap IT cos to see margin squeeze

A Reuters poll of brokerages estimates profits at Patni Computer Systems to fall 2 per cent, Mphasis Ltd to rise by 13 per cent and Tech Mahindra up by 18 per cent.

“The recovery will be US-led for midcap IT firms but the bigger worry is margins. Margin pressure will be more for the mid-caps than the large-caps,” said an analyst with Emkay Global.

Indian software companies are benefitting after services spend in the US, the largest market for the sector, is gaining traction post the global economic downturn.
However, operational challenges such as high attrition and wage inflation are likely to put pressure on margins, ICICI Direct said in a note.

“Companies have given an average wage hike of 12-14 per cent offshore and 2-3 per cent onsite to be competitive in an improving demand scenario,” an analyst with Mumbai-based brokerage said. Analysts expect margins of firms like Patni, Mindtree, Mphasis, HCL Technologies and Tech Mahindrato dip by 80-117 basis points during the quarter.

Companies like Tech Mahindra, HCL Tech and Mastek, with huge exposure to the UK and Europe, will be impacted as the dollar rose 7 per cent against the euro and 3.5 per cent against the pound in the quarter, analysts said. Europe is the second-biggest market for the sector after the United States.

Infosys Technologies, posted an unexpected decline in quarterly profit, and gave a muted forecast on concerns a weak European economy could curb new orders and dampen a recovery for India’s outsourcing sector.

Tata Consultancy Services, said it saw strong demand after posting a better-than-expected 21 per cent rise in quarterly profit, but was cautious about economic conditions in Europe.

Analysts agreed that there would be more clarity about the impact of the euro zone crisis on the performance of mid-cap IT firms over the next 2-3 quarters.