Satyam shadow clouds IT firms Q3 results

satyam

Bangalore: India's top software services firms are expected to report quarterly profit rose by up to a quarter, but the accounting fraud at Satyam Computer Services has further dented prospects in the slowdown-scarred sector.

Analysts said global firms, scared by the revelations of a $1 billion accounting fraud at New York-listed Satyam, might delay giving large contracts as they step up due diligence.

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Investors will be alert to companies' comments on any cancellation or delays of contracts, pricing pressures, and hiring prospects.

"While we maintain that over the long-term offshoring will remain a mega trend, in the medium-term the significant headwinds being faced by the companies are unlikely to subside in a hurry," said Harit Shah, a sector analyst with Angel Broking in Mumbai.

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Global companies such as Citigroup, ABN AMRO, Nortel and Airbus have outsourced work, taking advantage of India's large pool of English-speaking engineering workers and cheaper wages.

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But a recession in the United States, which accounts for more than half of India's total IT revenue, and turmoil in the global financial sector have brought the sector's scorching pace of growth to a grinding halt and battered stocks.

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Brokerage Emkay Global Financial expects sector bellwether Infosys Technologies to lower its fiscal year 2008/09 revenue guidance in dollar terms to about $4.70 billion from the company's October forecast of $4.72-$4.81 billion.

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Infosys, India's second-largest software services exporter, kicks off the sector's earnings parade on Tuesday, followed by industry leader Tata Consultancy Services on Thursday.

Satyam fraud

The massive financial fraud at Satyam, which has become India's biggest corporate scandal, was a negative for the industry, Citigroup said in a report.

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The $1 billion fraud whacked Indian stocks and the currency, as investors worried over the damage to foreign investment in Asia's third-largest economy and the once-booming outsourcing sector, a magnet for thousands of young job seekers.

The Indian government dissolved Satyam's board and appointed a three-man board after the company's former chairman confessed last week profits had been falsified for years and quit.

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"The due diligence on large contracts is likely to increase - this will increase difficulties for the industry in an environment where companies were struggling with lengthening sales cycles," Citigroup analysts Surendra Goyal and Vishal Agarwal wrote.

"In the short term, the deal velocity could come down further."

For a poll on India's top outsourcers, please see below. The table does not include Satyam.

A 3.6 per cent fall in the rupee against the dollar in the December quarter should have boosted profit margins of top firms, but the gains would be countered by the dollar's rise against the euro and British pound, other key markets.

Infosys, which competes with firms such as IBM and Accenture as well as local rivals for deals, gets about 40 per cent of its revenue from non-U.S. markets.

Shares in Infosys, worth $14 billion, fell 20 per cent in the quarter to Dec. 31. Tata Consultancy shed 28 per cent, in line with the sector index, while the main Mumbai index fell by a quarter.

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