Indian software exporters likely to post tepid earnings amid weak technology spending

  Tata Consultancy Services, Infosys and other top Indian software exporters are set to show subdued revenue and profit in April-June as rising costs and weak technology spending in some of their key markets cast a pall over outsourcing demand.

Growth in the quarter is likely to be crimped by weaker-than-expected demand in the financial services sector in North America that accounts for a bulk of the software industry's revenue, say analysts. Wage increases and higher cost of visa applications could also erode profits. Besides, a 3.2% average increase in the value of Indian rupee against the U.S. dollar has further escalated the pressure on margins.
Analysts expect Infosys, India's second-largest software exporter, to lower its dollar revenue growth outlook, on the back of uncertainty in demand. Bigger rival Tata Consultancy is expected to clock a slow start in revenue growth in the three-month period.
India's $116 billion software exports sector is under pressure to change its business models, with new Internet-based technologies such as cloud computing and automation fast replacing traditional software development and maintenance services that account for up to 85% of the industry's revenue. Rising protectionism in some of the largest markets such as the U.S. and the U.K. is adding to its woes.
Last month, the industry's main trade body, the National Association of Software and Services Companies, or Nasscom, said it expects the pace of growth for software exports to slow down this year amid the political and economic uncertainties in the largest markets. Nasscom expects industrywide revenue to grow 7% to 8% in the fiscal year that began in April, below last year's 8.6% pace.
"We expect the first-quarter earnings season to temper revenue optimism," Bank of America-Merrill Lynch said in a report last month. The North American financial services sector is unlikely to pick up pace in the quarter, and growth in retail remains weak, it said.
According to the BofA report, banks are in a "wait-and-watch" mode before raising spending on technology. "They await clarity on regulatory changes, the pace of interest rate hikes and taxation."
Tata Consultancy, which will kick off the sector's earnings season on Thursday, is likely see its first-quarter net profit slip 0.9% to 62.60 billion rupees ($968 million), on a similar decline in revenue to 295.93 billion rupees, according to the average of seven analyst estimates in a NewsRise poll.
Mumbai-based Tata Consultancy, which earns 40% of its revenue from clients in the financial services industry, may be one of the worst hit by the slowdown in the sector.
Bengaluru-based Infosys, which will announce its first-quarter results on Friday, is likely to report a net profit of 34.35 billion rupees, similar to last year, according to estimates. The Mumbai- and New York- listed company is set to report a 1.3% gain in revenue to 169.92 billion rupees in the quarter, the estimates show.

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