IT shares trade weak; TCS, Infosys and HCL Tech decline over 2%

MindTree, Tata Elxsi, Persistent Systems, L&T Infotech, Hexaware Techno, Mphasis, Cyient and Zensar Technologies have fallen by up to 6% in intra-day trade.

Shares of information technology (IT) companies were trading weak with Nifty IT index down by more than 2 per cent on Friday amid rise in Indian rupee against US dollar.

Tata Consultancy Services (TCS), Infosys, HCL Technologies, MindTree, Tata Elxsi and Tech Mahindra from the Nifty IT index were down more than 2 per cent on the National Stock Exchange (NSE) in the intra-day trade.

Persistent Systems, Larsen & Toubro Infotech, Hexaware Technologies, Mphasis, Cyient and Zensar Technologies fell by up to 6 per cent in intra-day trade.

Nifty IT index slipped 2.5 per cent to 13,959 points in early morning trade. At 11:10 am, the IT index was the sole loser among sectoral indices, trading1.6 per cent lower, as compared to a 0.22 per cent rise in the benchmark Nifty 50 index.

The Indian rupee today strengthened marginally as the US Dollar tumbled against the basket of currencies amid weak Institute for Supply Management (ISM) data. At 11.03 am, the rupee was trading at 69.90 a dollar, up 0.40% from previous close of 70.18. 

Meanwhile, analysts expect IT companies to report single-digit growth in constant currency (CC) terms during December quarter on quarter-on-quarter (QoQ) basis. The US dollar revenue is likely to grow at 0-6.6% QoQ, with a likely adverse cross-currency impact of 25-70bps. On margin front, they expect a flat-to-upward trend with rupee depreciation the key tailwind to offset lower revenue growth in a seasonally weak quarter

“We expect the IT firms under our coverage universe to post a combined 1.4% QoQ rise in USD revenue in 3QFY19E, in a seasonally weak quarter, owing to furloughs and lower billing days led by holiday season. Reported USD revenue is likely to be adversely affected on USD strength against cross currencies including EUR, GBP and AUD (1.3-2% QoQ appreciation on quarterly average rate),” Reliance Securities said in IT sector results preview.

The brokerage firm expects 50-70bps adverse impact of cross-currency movement in 3QFY19 for top-tier IT firms, while for mid-tier IT firms, impact is seen at 25-45bps (with the exception of Cyient, which is likely to see 66bps adverse impact on higher EUR, GBP and AUD exposure of >35% on combined basis).

In our view, key monitorables for the street from the 3Q results are likely to be digital growth and deal size trends, outlook for key verticals including BFSI, Retail and Telecommunications and CY19 IT budget outlook. Apart from this, deal flows and order book are critical data points to watch out for, it added.

“Gradually improving year-on-year (YoY) growth rates, anticipated continuum of the same in 3QFY19 and a strong order book have all been indicators of secular strength in demand for IT services,” Motilal Oswal Securities said in results preview.

However, multiple factors thwart the continuity of the same going into CY19, with potential causes of client caution being a slowdown of US macro, escalation of the US-China trade war and immediate ramifications of Brexit, it added.

The brokerage firm said commentaries by companies across the board and Accenture’s 1QFY19 performance indicate a status quo on business thus far. However, it believe that commentaries on client budgets will likely lend more clarity on the possible influence of the aforementioned factors.