Macro issues to dominate spends, but weak rupee will push gross margins.
Amidst the prevailing macroeconomic turmoil, analysts believe the software services sector is the best equipped to ride out the storm. Even as the management commentary on Infosys remains cautious, many believe it’s an aberration and not an industry-wide phenomenon. In an interaction with analysts, the company has indicated its third-quarter revenue growth will most likely be closer to the lower end of its 3.2-5.4 per cent sequential guidance.
While giving the third-quarter guidance, Infosys had assumed client activity would remain buoyant, as was the case in August-September. However, the company has conveyed this has not happened, with projects getting delayed and slower ramp-ups. Though there have been no cancellations, clients are looking at ways to conserve cash, keeping in mind the uncertain macroeconomic environment. Given that discretionary spends account for 35 per cent of Infosys’ total revenues, analysts expect new deals to get pushed out in this space. Most brokerages are building in Infosys’ FY12 revenues at the lower end of their guidance (17.2 per cent) for FY12.
However, not all vendors are this cautious. TCS does not expect any budget cut or demand weakness. The company has conveyed that revenue weakness in the third quarter would be due to seasonality issues and fewer working days. According to Nomura, TCS has indicated flattish budgets in the banking, financial services and insurance vertical for FY13 (compared to Infosys management’s indication of flat to low single-digit budget cuts).
So, will information technology (IT) services disappoint in the second half of FY12 and FY13? Not really, analysts believe. For starters, the falling rupee is expected to shore up gross margins by almost 500 basis points, claim analysts. Second, spending cuts have not really happened so far. Most vendors are expecting pricing to remain stable, going forward. There’s reason to believe this argument, as the US’ third quarter corporate results show that companies have held on to profitability.
This, according to Elara Capital, implies that clients have had time to adjust and “cost-take-out” projects, rather than discretionary spend, could become the theme in CY12. Analysts say clients will look at reinvesting in businesses but through reallocation of spends. According to Kim Eng Securities, IT spending by banks, retail and manufacturing sectors is driven more by efficiency improvements and regulations than by economic outlook.