IT firms to report FY08 growth in excess of 40%: Karvy

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R Ravi of Karvy Stock Broking discusses IT stocks' performance. He says that all companies in the tech space have reported a good set of numbers and believes that for FY07, most of them will end reporting growth in excess of 40%.

In his opinion, Tech Mahindra is definately a hit, while Geometric Software is not really on his best performers list.   

Excerpts from CNBC-TV18's exclusive interview with R Ravi:

Q: Tech Mahindra is stunning today. It's a big hit for you?

A: It's a biggest hit I would say. If you knock off that one time tax benefit they got from their UK operations, even then the sequential net profit growth of 35% is significantly higher. I expected around 15% growth, and again if they will be able to grow 35%, it would be phenomenal.

I think all tech companies, with exception of probably Geometric Software have reported a good set of numbers. Geometric's margin contraction was quite severe, but with that exception, all the companies have reported good set of numbers.

Wipro could have reported higher margin expansion, but on the contrary they reported margin contraction, because they would have to undergo the wage revisions with retrospective effect.

But overall in the tech space, all companies have reported a good set of numbers. My take is that for FY07, most of them will end reporting growth in excess of 40%, and I won't be surprised if such growth continues for FY08 probably beyond 35% as well.

Q: What's the problem with Geometric- its become extremely lumpy over the last four quarters, one good quarter and then one bad quarter? What's ailing this company?

A: For tier III companies, a couple of factors account for larger proportion of revenues, including product revenues and service revenue constituents.

If the product revenue doesn't fire to the desired levels, then the immediate increase in cost doesn't get absorbed. And as a result they have this problem.

Unless and until tier III companies migrate to tier II, which means having revenues in excess of Rs 750-1000 crore, this problem will persist. 

Even a tier II company like Mastek having reached a size of close to Rs 1000 crore, reports growth, which is quite sluggish. If there are few clients accounting for a large proportion of revenues, those clients could give more business resulting in an exceptionally good quarter, and vis-à-vis could result in a not so great quarter.

So it has to be seen that the top ten clients across don't account for more than 30% revenues like in the case like Mastek, Tech Mahindra and in Geometric. These companies have clients accouning for around close to 3/4 of the revenues, and if those clients don't give business, then there is a problem at hand.

If you look at Infosys and TCS , the top ten client accounts have done exceptionally well, and that is the reason why they have got all these margin expansions.

Disclosures:

I have only one stock Infosys, that's it.