Frontline software exporting companies are likely to post modest growth in their fourth quarter earnings on the back of increased overseas demand, analysts said.
However, a strong rupee and hikes in wages could impact the profit margins of the technology companies.
"Revenue growth is likely to be 3-5 per cent range in US dollar terms. Pricing may see modest rise, however, there may not be any earnings upgrade," brokerage firm Edelweiss said.
An analysis of earnings forecast by brokerages show the Indian IT firms would post an average growth of 4-5.5 per cent in the fourth quarter earning, with Infosys, TCS and Wipro leading the charge.
However, HCL Technologies and Patni Computers could post a sluggish volume growth, ICICI Securities said in a note.
According to the brokerages, the year-on-year performance would be robust, although sequentially there could be muted growth in revenue.
"We expect Q4 FY,10 to be one of the strongest quarters for IT sector and we feel that the large caps would lead the pack in posting volume growth," Unicon Financial said in its note.
During the January-March quarter, the domestic currency appreciated 1.6 per cent over the previous quarter against the US dollar. During the fiscal (2009-10), the rupee has risen 11.58 per cent against the greenback.
However, rupee appreciation could dent their Q4 earnings as well in the future as a majority of the IT firm's revenues are dependent on exports.
The appreciation of the rupee against major currencies will result in lower realisations in rupee terms, which will mute earnings growth in other foreign currencies, Angel Broking said.
According to Sharekhan, Infosys' would give revenue guidance for FY'11 at around the industry estimate of 13-15 per cent in the US dollar terms. The growth guidance may be more conservative in rupee terms, it added.
During the October-December quarter, Infosys had reported a 3.6 per cent decline in consolidated net profit at Rs 1,582 crore (Rs 15.82 billion). While, Wipro had posted a rise of nearly 34 per cent in its consolidated net profit. TCS' profit had risen by 21.26 per cent.
On the outlook for the sector, Edelweiss said it expects Tier I companies to report a 20-22 per cent revenue growth in dollar terms in the current fiscal (2010-11). "However Infosys' guidance could put a setback for the IT stocks over the short term," it said.
During the March quarter, IT industry witnessed increased hiring activity, which brokerages feel could impact the future profit margins.
"The hiring spree continued in Q4, and will result in an uptick in employee costs in the coming quarter, which would impact operating margins by 50-150 basis point," Angel Broking said.
During the December quarter, TCS added 7,692 employees, followed by Infosys (4,429), Wipro (4,855) and HCL Tech (1,245). The increased headcount is the highest addition in the last five quarters.
During the March quarter, the BSE IT index outperformed the benchmark Sensex with a 1 per cent return. The Sensex had given a return of 0.30 per cent during the period.
