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Software sector - A review

IT companies to report volume growth and constant currency revenues largely within the guidance range (wherever applicable). Rupee depreciation will further help revenue growth in INR terms. While part of the moderation in revenue growth in 3QFY09will be attributed to seasonality, guidance for the January - March quarter will be the key variable. We expect muted growth guidance in the backdrop of uncertain macro environment. Management comments on pricing, employee hiring and cost control initiatives will also be watched closely. All-in-all we expect lack-lustre constant currency performance and guidance. However, we believe most negatives are in the price. Infosys remains our large cap pick in the sector; Infotech is the preferred mid-cap.

Largely in-line volume growth expected

We expect the companies to report volume growth which should be largely in-line with guidance / expectations. We note that, the guidance for the quarter was already muted. The situation has deteriorated further in major global economies during the quarter and we expect the same to start getting reflected in the financials of Indian IT companies. Also, seasonality (lower number of working days in the quarter) will impact revenue growth for the quarter.

While there were several client specific concerns in 2QFY09, we have not seen any
such major announcements during this quarter. Even the "affected" accounts may
not reflect significant deceleration in most cases.Impact of cross currency movements largely factored in, we feel There have been significant cross currency movements with the USD appreciating against the Euro (approx 14%) and GBP ( approx 21%) on a quarterly average basis. This will likely have an impact on the US GAAP results and guidance for most companies. However, we feel that, this is more of an accounting issue and is already factored into the prices.

On the other hand, the depreciation of the rupee v/s USD on a quarter average basis, will benefit the Indian GAAP numbers and guidance. This will be partially setoff by the rupee's appreciation of about 7.7% and 2.25% v/s the Euro and GBP,respectively. Moreover, the final impact may vary depending on the extent of hedging done by various companies. For the Top 5 companies, we expect revenues to grow by 8.3% QoQ in INR terms. For the coverage universe, we expect the INR revenue growth to be 7.7% QoQ.