IT majors might disappoint in Sept quarter

Despite it being a seasonally strong one, due to lack of client spending revival in key areas; recovery could be pushed to March quarter

The July-September quarter is usually a strong period for India's top information technology (IT) service companies but this one is likely to be different. Analysts estimate the sequential revenue growth on a constant currency basis in that quarter for the top five IT companies at no more than two to three per cent.

Further, the expected revival in spending in the key segment of banking, financial services and insurance (BFSI) is also unlikely e soon, affecting revenue growth of the sector in FY18. Analysts are also cautious on the other key segment of retail. Among the top ones, HCL Technologies and Tech Mahindra are expected to lead with constant currency growth of 2.5-2.7
per cent; Wipro is see no more than 0.6 per cent.

 

Analysts at JM Financial say the absence of seasonal growth pick-up in July-September implies the FY18 dollar revenue growth will be muted for most. A relatively softer FY18 organic revenue growth forecast from Accenture of two to 5.5 per cent, against six per cent in FY17, adds to the expectation.

BFSI will continue to disappoint, given the shift of work to captive centres (in-house teams of clients) and lack of spending increase (demand). Most analysts now think spending will pick up only in the next budgeting cycle, starting in the 2018 calendar year; its impact will most probably be felt in FY19. Tata Consultancy Services is expected to see a higher impact among the top ones, as 40 per cent of its revenue comes from BFSI, say analysts.

While revenue growth would be muted, the margins are also likely to be impacted by planned pay increases. The estimated margin impact on this count is pegged at 50-150 basis points (bps). The other problems, say analysts at Nomura, are pricing pressure due to commoditisation of legacy offerings and the need to change onsite staffing due to tightening of immigration rules in America.

Among the larger companies, while most are expected to maintain their earlier forecasts, some brokerages believe Infosys, after its leadership change, could revise downwards its FY18 revenue growth expectation by 50-100 bps to a 5.5-6/7.5-8 per cent band, from an earlier 6.5-8.5 per cent. Some, however, say growth might not be affected, due to the long-term nature of contracts.

The Street will watch for revenue growth of digital services, client spending in key segments, Infosys' leadership and strategic roadmap, and the pricing and deal roadmap, believe analysts at Edelweiss Securities.

There are positives, too. For instance, the rise of the pound and the euro against the dollar. The impact or gain is pegged at 80-160 bps. Though the rupee has depreciated against the dollar, the impact is not much, given a similar realisation of Rs 64.6 in the September quarter as compared to Rs 64.4 in the June one. It also needs to be seen how much more Indian IT companies can squeeze on employee utilisation and selling and administration expense. In the past, some gains have accrued as companies were able to improve staff utilisation.

Despite the muted performance expected in the September quarter and in FY18, the stocks might not react much, as these are factored in, with the BSE exchange's IT index underperforming the benchmark Sensex by 20 per cent, year-to-date. Analysts say inexpensive valuations (13-17 times of FY19 earnings estimates) and free cash flow yield of five to seven per cent will provide support to share prices, unless the companies throw up negative surprises.