 "Earnings season may be a smooth ride for IT")
After many quarters of lacklustre performance, where only a few players posted healthy results, there are hopes that the forthcoming earnings season may show industry-wide growth. Such hopes are being fuelled mainly due to the depreciation of the rupee against the dollar, uptick in demand and improvement in the economy.
Analysts estimate a 2-5 per cent sequential rise in revenues for large-size IT players in July-September 2013, with hopes of a "blockbuster" performance by Tata Consultancy Services, and market-leading growth by Mindtree.
The bullishness in management comments over the past few months have added to analysts' beliefs that the July-September quarter would be a "strong" one for the industry, and the momentum may continue for a few more quarters.
Among other factors, the improvement in demand over the past few months is being seen as the main factor behind the widespread optimism. As growth and stability return to markets such as the US and UK, most industry observers believe that customers may increase their spending on IT in 2013.
"Actual spending by customers is now growing, as an outcome of which there's an increase in work volumes coming to India," says Sudin Apte, chief executive officer & research director, Offshore Insights, an advisory firm. "I believe that in the July-September quarter, we will start seeing some progress and it will ramp up over the coming quarters."
Two weeks ago, Tata Consultancy Services Chief Executive N Chandrasekaran , who has been bullish in his growth outlook and has maintained that 2013-14 will be a better year for business than 2012-13, reiterated that the company was witnessing the initial signs of global pick-up in demand.
Signs of a turnaround are visible to others too. Based on interactions with customers in September, Offshore Insights had said it expects the offshore market to grow 13-15 per cent in 2013, as client sentiment as well as spending levels were looking positive. The advisory firm's growth estimate for the sector is higher than industry body Nasscom's 11-14 per cent. Many say it is likely that Nasscom will revise its growth guidance for 2013-14. According to a recent survey by Morgan Stanley, the expectations for growth in IT budgets for 2013 have improved by 110 basis points since June 2013. The brokerage's survey was based on a poll of 100 investment officers in the US and 50 in Europe.
"The demand environment has been improving 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 recent pre-earnings note.
One of the top performers in the mid-size pack, Mindtree has also said that it is witnessing much stronger demand this year. "Demand is definitely better than what it was a year ago. We certainly believe that 2013-14 will be better than 2012-13," Krishnakumar Natarajan, co-founder, chief executive and managing director of Mindtree, had told Business Standard last month. "Distinctly, many customers strongly believe that the US is on the path of recovery and that Europe is not going to die. So demand is back."
The key parameters that Mindtree looks at to gauge demand are looking up. "The dollar value of the opportunities we are chasing is far better than last year. The number of opportunities is also higher than a year ago," Natarajan had said.
The company that is likely to benefit the most from this spurt in demand will be HCL Technologies. This is because the uptick in order inflows is coming to a great extent from re-bids, which is a focused space for the company. Also, HCL Technologies, which does not hold margins as sacred as some other peers like TCS and Infosys, is an aggressive player in the re-bid space.
Another booster for IT companies has come from the depreciating rupee. The rupee depreciated around 10 per cent sequentially against the dollar during the June-September quarter. Kotak Institutional Equities expects the weakness in the rupee to provide a 200-350 basis points tailwind sequentially across IT companies. Typically, every 1 per cent depreciation of the rupee results in 30-35 basis points benefit to an IT company's operating profit margins
As a result, even companies like HCL Technologies and Wipro, which were expected to take a hit in their profit margins in July-September due to the increase in employee salaries, may post flat-to-marginal improvement in profit margins. At the same time, many other players may see a significant improvement in earnings.
The stock markets reflect this optimism. "The Indian IT sector has outperformed the Sensex by 40 per cent year-to-date and one of the key reasons has been the 15 per cent depreciation in the rupee against major global currencies," Goldman Sachs said in a recent report.
While most large IT players are expected to meet their earnings guidance for July-September 2013, some may even raise expectations of their full-year growth. Analysts say Infosys may be one company to revise its revenue guidance. At the beginning of 2013-14, Infosys had estimated 6-10 per cent growth.
"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 will 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," says a Mumbai-based analyst with a foreign brokerage.
Amid this buoyant sentiment, Wipro, which has been criticised for its poorer-than-expected performance over the past few quarters, is also expected to post growth closer to the higher end of its revenue guidance of 2-4 per cent in the July-September quarter. Analysts say deal closures at Wipro have been in line with revenue expectations.
The rupee factor
Like for the rest of the industry, the rupee depreciation will provide support to Wipro's July-September earnings, even though the gains are expected be be lower when compared to peers due to hedging losses and the full impact of the wage increase given in June 2013 that will be felt in the quarter.
Amid such high expectations, Infosys' earnings 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 management's comments on the near-term outlook.
"We expect Infosys to give a modest second half outlook and fine-tune its 2013-14 dollar revenue growth guidance. Wipro should follow suit. Infosys commentary on better margins in the second half could lead to earnings per share estimate upgrades for the street regardless of its full-year revenue guidance. We believe Wipro could guide for 2-4 per cent quarter-on-quarter dollar revenue growth in the December 2013 quarter," Morgan Stanley said in its report.
While things on the whole are looking up for the sector, which gets over 60 per cent of its revenue from the US and over 20 per cent from Europe, it may have to contend with some challenges on the domestic front. As the country is headed for elections, government spending is likely to slow down. Even as IT companies' exposure to Indian markets is small, this may impact TCS and Wipro, two large players in the domestic market.