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Even as Indian information technology (IT) services companies are expected to post growth in revenue for the quarter ended June, the margins of most tier-I players are likely to be under pressure, owing to salary increments, visa costs and appreciation of the rupee.
Earnings for the quarter will be support by favourable seasonality, as typically, the April-June quarter has more billable days and client spending picks up during this period, analysts say.
“Revenue growth for Indian IT was modest in the January-March quarter (of FY14) due to pockets of weakness in key markets such as North America. We expect acceleration in revenue growth in the June quarter, as clients’ IT spending picks up seasonally, along expected lines,” Kotak Institutional Equities said in a note. “Further, markets such as North America, retail and manufacturing, which were a drag in the previous quarter, have recovered.”
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While earnings for the quarter ended June might take a marginal hit due to appreciation of the rupee, some analysts believe to an extent, the impact could be mitigated by benefits on the cross-currency movement front.
Kotak Institutional Equities said, “We expect operating margins for tier-I Indian IT to decline 110-210 basis points in the quarter ended June…The decline will largely be driven by a more-than-2.5 per cent appreciation in the rupee versus the dollar, wage increases for all companies except HCL Technologies and the higher visa costs typically incurred in April, when visa applications are filed.”
“Investor focus will be on the levers available at the companies’ disposal to protect profitability in case of further appreciation in the rupee,” the note added.
Several analysts feel the earnings of large companies in the IT services sector are likely to be a mixed bag due to company-specific issues. They say tier-I companies’ quarter-on-quarter revenue growth for the June quarter is likely to be 1-4.5 per cent, with Tata Consultancy Services (TCS) being closer to the top end, while Wipro is expected to be closer to the lower end.
Within the tier-I pack, Infosys is seen benefiting from the cost-rationalisation measures initiated by founder N R Narayana Murthy through the past year. Due to these measures, Infosys had posted a better-than-expected net profit for the quarter ended March this year, despite negative growth on the revenue front sequentially.
“Given the ongoing management transition at Infosys, we don’t expect any material change in the company’s guidance (seven-nine per cent growth in dollar revenue for FY15),” Religare Institutional Research said. “Further, Wipro’s guidance for the second quarter will be closely monitored and we expect it to be two-four per cent dollar revenue growth. We note the macro climate in developed markets is improving and remains supportive of the sector. That said, a sharp appreciation in the rupee remains the key risk to our estimates.”
Infosys’s city-based peer Wipro is expected to continue with its slow-and-steady growth performance for the fourth consecutive quarter, following muted growth through several quarters. For the June quarter, the company has estimated IT services revenue of $1.71 billion (a sequential decline of 0.3 per cent) to $1.75 billion (a rise of two per cent).
The June quarter is likely to see elevated levels of attrition across companies, as employees usually tend to exit during this quarter, following annual increments, or for higher studies. At Infosys, attrition will be closely watched, as this stood at an all-time high of 18.7 per cent the March quarter; most analysts expect Infosys’s attrition during the June quarter to be higher.
Investors are likely to closely track the forecasts and outlooks given by the managements of companies in the sector, as these will set the mood for the coming months. While most analysts are optimistic about an uptick in deal-signing and project take-offs, they will await management remarks in this regard.
