NEW DELHI: Software companies, led by Infosys Technologies and Tata Consultancy Services, are set to report higher revenues for the December quarter as firms such as British Petroleum increased outsourcing, but a stronger rupee and higher wages could reduce profitability, say analysts. Although profitability may fall, industry may cheer the revival of order flow after more than four quarters of uncertainty on new businesses as companies in the West grappled with recession and credit crisis. Revenues may rise as much as 4% on quarter, some analysts say.

“The macro situation has improved. The order book is better now. Companies might outperform vis-a-vis guidance,’’ said Harit Shah, research analyst at Karvy Stock Broking. The $60-billion Indian IT sector that depends on the US and Europe for most of its revenues, has been facing tough business conditions for more than a year as their clients such as Citigroup and General Electric were cutting costs as the credit crisis reduced demand. But the situation has improved in the past few months with steady flow of orders as developed economies emerged out of recession. But the appreciation of the rupee against the US dollar, would reduce profitability.

“We are seeing stability and an improvement in demand that we had talked about the last quarter,’’ said Suresh Vaswani, joint CEO, AT Wipro Technologies. The rupee’s rise from 49-50 levels in Q2 to 46-47 levels in the third quarter will impact margins. For every 1% strengthening in rupee, margin impact can be up to 50 bps in large companies, analysts said.

The rupee has been one of the best performing currencies in the region in the December quarter as global funds poured money into India expecting a strong economic growth. The quarter saw deals like British Petroleum global vendor consolidation contract worth over $2 billion shared among others by TCS and Infosys. Also, implementation of software packages such as SAP and Oracle which were onsite heavy are now about 60% offshore. IT companies like HCL Technologies have gained from this shift and HCL’s buyout of Axon helped.

The revival of order flow has also brought in higher costs for companies as they paid more wages, in some cases as much as 11% more, to retain talent to execute orders. And companies could not raise the fees they charged for services as they had to compete aggressively for new orders. “There will be a margin impact of about 25 bps due to salary hikes and variable payout,” said Shashi Bhushan, senior research analyst at Prabhudas Lilladher. “Pricing has been muted with a positive bias that is not too bad for this year,”he said.

The revival of businesses may ensure continued order flows, but may not necessarily lead to rising profitability as the currency movements may be adverse. “Margins are not sustainable as the rupee is strengthening,” Bank of America-Merrill Lynch wrote in a report. BoA-ML sees rupee/dollar at 45 at March end and at Rs 43 at end December 2010 and this will have a negative impact on margins in coming quarters.

Wages will climb up even as pricing will be under pressure. Discretionary sales and marketing spends will also move up.