R Ravi of Karvy Stock Broking believes that all IT companies will have to pay higher taxes and the effective tax rate provisioning for the industry, which has been hovering between 10-12 per cent, will definitely go to around 16-18 per cent.
He adds that for Infosys, he is expecting revenues to grow by 8.8 per cent and its profit at reported level should be around 7.1 per cent. In case of Wipro, he expects their IT and ITES revenues to grow healthy, close to 7 per cent and for TCS, he is expecting the topline to grow by around 8.5 per cent.
Excerpts from CNBC-TV18's exclusive interview with R Ravi of Karvy Stock Broking:
What are you expecting in terms of earnings from the big three- Infosys, Wipro and TCS?
For Infosys, I am expecting revenues to grow by 8.8 per cent and its profit at reported level should be around 7.1 per cent. In case of Wipro, their IT and ITES revenues will grow healthy, close to 7 per cent and the bottomline growth will be flat. For TCS, I am expecting the topline to grow around 8.5 per cent. But the profits will be growing only 4.8 per cent precisely for the same reason of higher tax provisioning.
The Patni Computer Systems announcement says that there are some back taxes that they have to put into their accounts in the range of about USD 23-33 million. Have you had a look at that statement that came from them?
I have not looked at it but when I built my tax forecast, I am already providing a much higher tax provisioning, though most companies have an effective tax rate of around 14-16 per cent.
But for FY07, I am building between 18-19 per cent. So I do not think the shock should be a severe one but nevertheless, I need to speak to the company and get more clarity on that. It is definitely bad news for the company.
When you said 18-17 per cent, was it only for Patni or are you building that in for the sector as a whole?
For the sector as a whole, even if one looks at TCS; for the last quarter, it has made a provision of 9.6 per cent. The pre-tax, which they factored in for this quarter was around 14 per cent. So I am not trying to predict lower taxes, I am actually expecting taxes to go up.
I am building that into the model because anyway, we have to marry a situation of higher taxes provisioning. So all the taxes will be between 16-18 per cent for most IT companies, the actuals can be much lower or higher, but I am going with the assumption at this point of time.
Because of the tax revenue in the US, do you think some other companies will also have to record a liability in the quarter that just ended, that is the Q1?
I need to look into that particular release, but definitely my take is that all companies will have to pay higher taxes and an effective tax rate provisioning for the industry, which has been hovering between 10-12 per cent, will definitely go to around 16-18 per cent.
I am talking of the average for the industry. Company specifics will change because if Infosys Technologies is paying around 17-18 per cent effective tax rate, other companies having the same revenue mix and the same cost structure, have a much lower tax provisioning.
How are you looking at the salary cost going up in the companies because we had a lot of reports of more people joining, which is good news and also higher salaries on the whole?
For this quarter, I am building an average rate of inflation of 14 per cent. But there is a wage rebalancing happening within the companies. If the additions are going to be more lateral then the wage inflations will play out.
But if the addition is going to be at the entry level, then it is not going to make a severe dent. Similarly if you look at the onsite, salaries are going up between 3-4 per cent, so that is also having a negative impact on the margin.
But we have to see overall how wages are played out; we cannot look at one standalone incident and say whether the inflation is going up or down. It has to be seen which constituent of the total employee strength is going up and if the laterals and onsite goes up, then definitely that gives a negative impact to the margins.
What kind of rates do you see these companies reporting in the last quarter?
I think billing rates will be flat to modestly up, for Infosys. I am expecting the billing rates for the company to inch up around 0.5 per cent on an overall basis. For TCS, I do not get that, but I think that it will be in line with Infosys.
Wipro too should experience a similar kind of a billing rate increase. Normally, the billing rates go up between 0.2-0.5 per cent at this point of time.
What kind of a forecast do you hope to get from Infosys because that is the first big number coming out? What would you be looking for? What would you be hoping for?
I do not think that there will be any dramatic increase. There will be a modest upward increase because the Infosys management has clearly guided its investors that the actuals will not be significantly different as compared to the last quarter guidance that the company has given for the full year.
There will be a modest increase, but I would not expect it to go up significantly. As this quarter progresses there will be Rs 1-1.5 increase. So maybe, if the rupee keeps on depreciating on the back of Fed's increase in the interest rates, my take is that they should close the year with an EPS of around Rs 120-123.
How much of an impact on margins do you see because of what's been happening with the rupee?
For this quarter, most IT companies, the margin impact will be positive with the exception of TCS and Satyam Computer Services. For Infosys, I am expecting the margins to improve by 70 bps. In the case of Satyam, I am expecting it to be flat because Satyam will have to increase a lot laterally and they also need to increase it because their total wage structure is much lower than the rest. So they need to do it much aggressively as compared to others.
So if they are able to maintain operating margins at the last quarter levels, it will be great. For TCS, I am expecting the margins to decline by about 60 bps because there would be an increase in the foreign stay allowance and there will also be an increase in the sub contractors' wages on account of which I am expecting their margins to decrease.
Plus there will be integration cost attached because they will be acquiring a lot of companies and integrating it into the company and naturally there will be certain amount of wage rebalancing to be done on the higher side. So on account of this, TCS will see margins contraction despite the rupee depreciating by close to 2 per cent.
As a stock which one is your top pick at this point?
If you look at tier one, I am quite positive on all the stocks whether it is Infosys, TCS or Wipro. On HCL and Satyam I have an out performer rating and on Patni, I have a buy rating. But I think these tax shots will keep the investors at bay at this point of time.
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