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With several key metrics showing signs of improvement, expectations from the Indian information technology (IT) sector are running high. After many quarters of lackluster performance, where only a few players posted healthy results, there are hopes that the upcoming earnings season may show an industry-wide growth.
Such hopes are being fueled mainly due to the depreciation of rupee, uptick and demand and improvement in macro economy.
Analysts estimate a 2-5% sequential rise in revenues for the large-size IT players in July-September, 2013, with hopes of a “blockbuster” performance by Tata Consultancy Services, and a market-leading growth numbers by Mindtree.
Signs of bullishness in management comments over the past few months are adding to experts’ beliefs that July-September would be a “strong” quarter for the industry, and the positive momentum may continue going forward.
Among other factors, the improvement in demand over the past few months is seen putting the IT sector in a “sweet spot”. With economic growth and stability returning in the key markets--US and UK, most industry observers have said that clients may increase their spending on IT in 2013.
“Actual spending by clients is now growing, as an outcome of which, there's an increase in work volumes coming to India,” Sudin Apte, chief executive officer & research director, Offshore Insights said. “I believe that in July-September we would have started seeing some progress and it will ramp up over the coming quarters,” he said.
Two weeks ago, Tata Consultancy Services CEO N Chandrasekharan, who has remained bullish in his growth outlook and has maintained that FY14 will be a better year for business than FY13, reiterated that the company is witnessing initial signs of global demand picking up.
Based on interactions with clients, in September, Offshore Insights had said it expects IT offshore market to grow 13-15% in 2013, as client sentiment as well as spending levels are looking positive. The independent advisory firm’s growth estimate for the sector is higher than industry body Nasscom’s aim of 11-14%.
There are now hopes that Nasscom may also look to raise its growth guidance for FY14.
As per a recent survey conducted by Morgan Stanley, the expectations for growth in IT budgets for 2013 have improved by 110 basis points since June 2013. As part of this quarterly survey, the brokerage firm polled 100 investment officers in the US and 50 in Europe.
“The demand environment has been improving for most of the companies, as seen by recent trends. The September quarter is usually a slightly stronger seasonal quarter as well. Consequently, revenue growth should be strong,” Credit Suisse said in a pre-earnings note.
One of the top performers in the mid-size pack, Mindtree has also said that it is witnessing much stronger demand that a year ago.
Demand is definitely better than what it was a year ago. We certainly believe that FY14 will be better than FY13,” Krishnakumar Natarajan, co-founder, CEO and managing director of Mindtree told Business Standard last month.
“Distinctly, many customers strongly believe that the US is on the path or recovery and that Europe is not going to die. So demand is getting back,” he added
All parameters that the company assesses to gauge demand scenario are looking up, Natarajan said. “The dollar value of all the opportunities that we are chasing, that number compared to last year is far better. The number of opportunities is also higher than a year ago,” he said.
Indian IT exporters get over 60% of their revenue from US, and over 20% from Europe. While US and Europe appear to be on a path to recovery, the Indian market may perhaps pose challenges for IT players.
India is headed for elections next year, during which period government spending slows down. Even as IT companies' exposure to Indian markets is very small, this may have some impact on TCS and Wipro, which have some presence here.
Separately, the strong depreciation in rupee during July-September, 2013, which was a cause of concern for most other Indian industries, came as a boom for the IT players.
The Rupee depreciated around 10% sequentially against the dollar during the reporting quarter. Typically, every 1% depreciation in rupee gives an around 30-35 basis points benefit to IT companies' operating profit margins.
Kotak Institutional Equities expects rupee depreciation to provide a 200-350 basis points tailwind sequentially across IT companies.
Thus, even companies like HCL Technologies and Wipro, which were expected to take a hit in margins in July-September due to wage hikes, may post to flat-to-marginal improvement in margins. Many other players may see a significant improvement in earnings due to high foreign exchange gains.
“The Indian IT sector has outperformed the Sensex by 40% YTD (year-to-date) and one of the key reasons has been 15% depreciation in INR (Indian rupee) against major global currencies,” Goldman Sachs said in a report.
While most large IT players are expected to meet their earnings guidance for July-September, 2013, there are hopes that some may go ahead raise expectations of the full year growth, in view of these factors that have played out favourably.
Considering Infosys management's optimistic commentary through the past two months, analysts are hoping that the company may be one of the players that raises its revenue estimate for this financial year.
At the beginning of the 2013-14, Infosys had estimated 6-10% growth in revenue.
"At the lower end of the guidance shared by Infosys, the company was expecting a decline in revenue for the second, third and fourth quarters. But there is no reason for us to believe the company would see a fall in revenue in the reporting quarter (July-September). So, we are hoping there would be a meaningful upward revision in Infosys's guidance," said a Mumbai-based analyst with a foreign brokerage.
Amid this buoyant sentiment, Wipro, which was earlier being criticised for its poorer-than-expected performance over the past few quarters, is also expected to post a revenue growth closer to the higher end of its revenue guidance of 2-4% for July-September, 2013. Experts believe that deal closures at Wipro seem to have panned out in line with expectations.
While the depreciation of Rupee is also likely to provide support to Wipro’s July-September earnings, the gains will be lower as against peers due to hedging losses and as full impact of the wage hike given by the company in June 2013 will be felt.
HCL Technologies is likely to be among the top beneficiaries of the recent spurt in demand, as the uptick in orders inflows is coming to a great extent from re-bids, which is a focused space for the company. HCL Technologies, which does not hold margins as sacred as some other peers like TCS and Infosys, is an aggressive player in the margin-diluting re-bid space.
Amid such high expectations, Infosys' earnings, which will be detailed on Friday, are likely to set the tone for the entire IT sector. Besides strong earnings for the reporting quarter, industry observer, analysts and investors will closely watch out for the Infosys management's comments on the near-term outlook.
"We expect Infosys to give a modest 2H (second half) outlook and fine-tune its FY (14) USD revenue growth guidance. Wipro should follow suit. Infosys commentary on better margins in 2H could lead to EPS (earnings per share) estimate upgrades for the Street regardless of its FY revenue guidance. We believe Wipro could guide for 2-4% quarter-on-quarter USD revenue growth in the Dec-13 quarter,” Morgan Stanley said in a report.
Many analysts are also expecting Infosys' earnings to have a bearing on the overall market sentiment in the near-term.
