Q2 earnings: Top IT services companies likely to report steady growth

Top IT services companies are likely to report steady growth in earnings during the second quarter of the financial year though revenue increase on year-on-year is likely to take a hit owing to uncertainties in the macro environment. Though deal closures are likely to be affected compared to previous quarters, Infosys and HCL Technologies are expected to lead in revenue growth following the ramping up of some of their major outsourcing contracts.

Analysts are still cautious about the outlook for the banking, financial services and insurance (BFSI) vertical. In Q2FY20, market leader Tata Consultancy Services (TCS) will also be watched closely for any headwinds arising out of the slowdown in the BFSI segment in Europe.
 

“We expect revenue growth in constant currency between 1.3 per cent and 6.5 per cent sequentially for tier-I IT companies. Q2 is a seasonally strong quarter but the YoY revenue momentum will be muted for most IT companies and deal closures will be muted due to an uncertain global environment,” wrote Aniket Pande, research analyst, Prabhudas Lilladher.
 

Further, analysts expect little change in pricing commentaries with continued pressure on legacy business, though a stable deal flow in digital business may somehow compensate for it. With BFSI in Europe under stress, noted the report, the focus will be on TCS’s order bookings in order to track double-digit growth possibilities apart from client sentiment.

Currency headwinds of 30-70 basis points are also factored in because most currencies have depreciated against the dollar.

“We expect rupee depreciation to largely flow-through in Q2 FY20 Ebit margin. We expect 72-160 bps expansion for tier-I IT companies while most others will see the impact of annual wage hikes. With regard to PAT, we expect between 0 (and) 14 per cent sequential growth,” wrote Pankaj Kapoor, research analyst, JM Financials.
 

EBIT (earnings before interest and taxation) margins are also likely to suffer on a YoY basis as well due to a rising cost structure in the US, larger investments in digital, and the transition costs of large deals closed over the past year.

According to Kawaljeet Saluja, research analyst at Kotak Securities, TCS is expected to report 2.6 per cent sequential revenue growth while Bengaluru-based Wipro is likely to disappoint with 1.2 per cent q-o-q revenue. “Revenue growth for HCL will be powered by completing the acquisition of select IBM products.”
 

Infosys is expected to lead the industry with 3.5 per cent sequential revenue growth, aided by a ramp-up of large deals and broad-based growth across verticals. Both Infosys and HCL are expected to revise their revenue growth guidance upwards.

While Infosys may revise its annual revenue growth guidance to 9-10.5 per cent YoY (compared to 8.5-10 per cent earlier), HCL may project 15-17 per cent as against 14-16 per cent given earlier.
 

BFSI, which contributes a third of IT revenues, is of particular concern at present with the global scenario getting increasingly uncertain. “While total contract value (TCV) growth in FY19 and Q1 FY20 has been fairly strong, these have not really translated into adequate organic revenue growth pick up,” wrote Girish Pai, head of research, Nirmal Bang.

Midcaps may fare better
 

Among midcap IT companies, analysts are bullish on the growth prospects of Persistent Systems and Hexaware Technologies.

“Persistent Systems is likely to perform better in the second quarter with 4-5 per cent sequential growth in revenue,” said Sanjeev Hota, head (research), Sharekhan.
 

Similarly, despite client-specific issues, Hexaware is also expected to see better revenue growth in the September quarter. “Despite Hexaware having two major client-specific issues, the company had delivered a double-digit growth rate in the past quarter. We expect this to continue. Also, the midcap firm’s focus on fewer verticals is also going to help it to perform better in the near-term,” said Harit Shah, senior analyst at Reliance Securities.
 

Analyst said L&T group companies including LTTS and LTI might report a mixed set of numbers in Q2. Sequential revenue growth for LTI is likely to be around 1 per cent due to a ramp-down of major high tech client. However, revenue growth for LTTS is likely to be healthy with a 2.6 per cent sequential rise.