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Infosys Q3 Profit Seen Up

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Software companies are bracing for a slower pace of outsourcing contracts in 2012 when they kick off quarterly earnings this week because of the lingering debt crisis in Europe, their biggest market after the United States.

Infosys, the country's No.2 software services exporter, bigger rival TCS and third-ranked Wipro get about three-quarters of their revenue from the United States and Europe.

"Right now the discretionary spend into the calendar year will be the key challenge to watch out, for the tech companies," said Dhiraj Sachdev, a senior fund manager at HSBC Asset Management Ltd. "There is some kind of sense or early indication that sales cycles may lengthen."

Global spending on information technology will rise at the slowest pace in three years in 2012 as Europeans, worried about the region's sovereign debt crisis are cutting back on investments, research firm Gartner Inc said on Jan 5.

Gartner predicted global IT spending would rise 3.7 per cent in 2012, down from its earlier estimate of 4.6 per cent. The forecast for Western Europe was slashed to a 0.7 per cent drop in spending from a previously expected rise of 3.4 per cent.

Infosys is expected to report on Thursday a 30 per cent profit rise for the December quarter, helped by an 8 per cent slide in the rupee, but the market will be focusing on any revision in forecast for the fiscal year ending March 31, comments on demand momentum, hiring and acquisition plans.

Brokerage Kotak Securities said in a report that it expects Infosys to lower its dollar revenue growth guidance for the year to March to 17 per cent to 17.5 per cent from its October guidance of 17.1 per cent to 19.1 per cent.

HSBC's Sachdev said the budget for technology spending by the financial services sector in Europe will be a decisive factor for Indian software companies, which compete with Accenture Plc and IBM Corp for contracts to maintain computer systems and write software applications.

Accenture posted strong quarterly results last month, but the technology outsourcing and consulting company gave a cautious view of the second quarter amid the worsening global economy.

The rupee was the worst performer among Asian currencies in 2011, losing nearly 16 per cent against the dollar.

The weaker rupee may help Infosys gain about 295 basis points in margins for the December quarter, compared with July-September, while Wipro may gain 55 basis points, CLSA analysts said in a report.

"One per cent depreciation in rupee (leads to) a net inflow of some 30 basis points in margins," Infosys chief executive officer S.D. Shibulal told Reuters in an interview in November.

However, economic uncertainties are slowing decisions on technology spending by overseas companies, said Shibulal, who is also a co-founder of Bangalore-based Infosys, a pioneer in India's nearly Rs 396,720 crore IT services sector, said.

"We're clearly seeing it. The slowness has increased in the last month or month and a half," he said in November.

German and French leaders met on Monday to discuss how to boost growth in euro zone states struggling to tackle the sovereign debt crisis, amid growing market worries about the health of the global economy.

"We forecast net profit to grow faster than revenue for the top three vendors despite unfavourable cross-currency movements and hedging losses during the quarter," said UBS analyst Diviya Nagarajan in a note, referring to the October-December quarter.

She has a "neutral" rating on Infosys and a "sell" rating on TCS and Wipro.

Shares in TCS dropped 0.4 per cent and Infosys fell nearly 20 per cent in 2011, compared to a nearly 16 per cent drop in the BSE IT index and roughly 25 per cent loss in the BSE Sensex.

Infosys, which has a market value of nearly Rs 161,820 crore, trades at 17.5 times its forward earnings, compared with nearly 19 times for Tata Consultancy and 15.5 times for Wipro, according to Thomson Reuters StarMine data.

Infosys' operating margin at 28.2 per cent for the three months ended Sept 30 was the highest among its local peers and ahead of IBM's 19.8 per cent with Tata Consultancy, which has recently seen its quarterly profit growing at a faster pace, at 27.1 per cent, the data show.