INDIA BUSINESS WORLD - OCTOBER 2006
THE MONTH THAT WAS...

INDIA INC BOTTOM LINE HITS THE ROOF

   INDIA Inc is on a roll. Around 450 companies, which have declared results for Q2 ended September ‘06, have registered combined growth rates of 30% in net sales and 36% in net profit, compared to 19% each for Q2 FY06.

   And that's not all. The operating and PAT margins for this quarter are also higher than the corresponding margins last year. While the operating margin improved to 24.4% from 23.8%, the PAT margin went up to 12.3% from 11.8%.

   While oil, IT and cement majors contributed largely to a higher growth rate for the current quarter, firms like Adani Enterprises, Ispat Industries and IDBI, which witnessed a turnaround after a sales decline last year, also had a major impact.

   The analysis also shows that India Inc is improving its margin through cost rationalisation and better pricing, unlike last year, when lower interest costs and tax rates had to compensate for the fall in operating margins for maintaining the PAT margin.

   This comparison is brought out clearly in the operating profit growth rate. While the combined operating PBDIT for the sample companies registered a growth of 34% for Q2 FY07 over the corresponding quarter of the previous year, the growth rate was just 9% for Q2 FY06 over Q2 FY05. Cost of goods sold (COGS) as a percentage of net sales has firmed up to 45.4% from 44.2% last year and the staff cost to sales ratio has risen marginally to 8.5%. However, there has been significant reduction in selling and administration costs and overheads. This is evident in operating margin going up to 24.4% for quarter ended Sept '06 from 23.8% in the previous year. Around 60% of the companies in the sample improved their operating margins.

   On the interest cost front, however, the ratio has remained stable at 7.7% like last year, after dropping from 8.3% in Q2 FY05.

   ITS BEEN a bumper second quarter for the Indian IT industry. While the topline of the eight IT companies, has grown by an impressive 46%, the bottomline has grown at 49% on a YoY basis. Operating margins too increased by 200 basis points on average for these companies. Growth in this quarter was driven on both the volume and pricing front. Moreover, for most of these companies, barring Wipro and Satyam, there were no visa related costs or salary hikes, as these had been taken care of in the first quarter.

   The eight companies include IT bigwigs such as Infosys, TCS, Wipro, Satyam, HCL Tech as well as some mid- and small-sized companies such as Hexaware, i-flex and NIIT Technologies. Combined revenues of these eight companies crossed Rs 15,000 crore this quarter, an increase of around 11% on a sequential basis. On a YoY basis, their revenue grew by 46% this quarter, higher than the YoY growth of 42% during the same quarter last year. Net profits grew by 49% this quarter on YoY basis compared to a 59% in the same quarter last year. However, excluding TCS, the YoY bottomline growth was just 25% last year.

   Larger companies continue to outshine the smaller ones in revenue growth. Infosys and TCS, for instance, grew by over 50% on YoY basis, whereas Hexaware and i-flex Solutions grew by 28% and 43%, respectively, this quarter. However, the bottomline of the smaller players has grown at a healthy rate, with iflex Solutions more than doubling its profits on a YoY basis.

   Apart from Satyam and Wipro, whose margins were impacted with the salary hikes this quarter, all other companies witnessed an expansion in their operating margins. Apart from buoyant revenue and slowdown in expenditure growth, depreciation of the rupee by 1.4% on an average during the quarter also helped in margin expansion. In the case of Infosys, for instance, the rupee depreciation helped margins grow by 90 basis points and TCS witnessed a 50 basis point increase on account of favourable exchange movements. Both Infosys and TCS witnessed a margin expansion of around 300 basis points this quarter over the June ended quarter.

   Other factors such as an offshore leverage in the case of TCS, too, helped margin expansion. There was some offshore shift in the company's business, with the share of offshore-onsite mix improving from 37:63 in the September ended quarter last year to 41-56 this quarter.

   During the quarter, companies also experienced an upward bias on pricing. For bigger IT companies, new contracts came at rates higher than 3-4% than their average rates. According to TCS and Infosys, global demand situation was buoyant and they were able to make the most of this growth.

   Revenues were largely driven by differentiated services while the revenue share of application, development and maintenance (AMD) services continued to decline. The new services, however, differed for different companies. For TCS, the revenue share of business intelligence, global consulting, assurance services and infrastructure services witnessed an increase while the share of AMD services fell from 60% in the September ended quarter last year to 52% this quarter. In the case of Infosys, the package implementation services have undergone an impressive growth and its share in the revenues has been increasing consistently.