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Citi Research could not have timed its research any better. Just days before the start of the earning season, Citi had said that the run-up in IT services stocks is nearing its end. The sector currently trades at 18.5 times their one-year forward earning numbers. The last time such a valuation was given to the IT sector was when the top four companies were growing at around 25 per cent as compared to 10-15 per cent in the current scenario.
Citi argues that the general improvement in the macroeconomic environment is not translating to revenue acceleration in the IT services landscape. This could be due to commoditization in some of the traditional IT service lines. Among the other reasons cited are high market share in the applications business and Cloud/SaaS impacting enterprise solution business.
As if to prove Citi right, TCS- the largest IT services company in India- posted a lower than expected volume growth. Motilal Oswal in its report on TCS quarterly numbers says that a 6.4 per cent sequential volume growth by the company was lower than their estimate of 7.8 per cent. Kotak Securities says that though TCS will meet its FY15 estimated growth guidance numbers, the company has missed or barely met their estimates in three out of the past four quarter numbers.
HCL Technologies too has missed analyst estimates in its September quarter numbers. Broking firm Prabhudas Lilladher says that HCL Technologies has posted a softer revenue growth though its margins are intact. Against an estimate of Rs 8,840 crore, the company posted revenues of Rs 8,735 crore.
Till date, Infosys is the only company that has surpassed analyst expectations in the September quarter. This is partly due to lower expectations from the company and a restructuring being undertaken by Infosys under a new CEO, Vishal Sikka who is overseeing a revival after a dismal performance over the last many quarters preceding his entry. But, the company is still growing at a much lesser pace than the sector.
So is the IT growth story over, despite global markets showing some signs of pick-up? Prabhudas Lilladher commenting on HCL Technologies results says that the company’s repeat business has weakened and there is weakness across their clients. Moreover, top 10 clients witnessed decline, a rarity in recent times.
As for TCS, Motilal Oswal pointed out that the company’s management has cited that it remains in a wait and watch mode for adequate pick-up to meet earlier outlook. Kotak Securities pointed out that TCS fell short on its revenues by $20-25 million on account of a slower than expected ramp-up in the retail verticals and continued softness in insurance vertical. Due to the miss in 2QFY15 revenues, the company believes it will no longer be able to meet the earlier guidance of exceeding FY2014 organic constant currency revenue growth of 16.2 per cent. Little wonder the stock closed the day 8.73 per cent lower on announcement of its results.
Analysts now are changing their estimates downward on account of the recent developments. Wipro, the last of the four biggies in the IT sector is yet to announce its results, but the trend from two of the top three companies is clear that the honeymoon period of IT sector is over.
