Slowdown in the financial services vertical could hurt TCS and Infosys in Q2.
The second quarter earnings season is just around the corner and all eyes are on Tier-I information technology (IT) services firms. From the look of it, the note of caution Infosys has been voicing all through this year has been based on hard facts. The signs of slowdown are becoming apparent in the US, as the financial services sector begins to cut expenditure through job cuts. Nobody expects a higher-than-guided revenue and earnings outcome this quarter. In fact, analysts now believe there is a downside risk to the earnings of Infosys.
If indications are anything to go by, the fourth quarter numbers reported by Accenture don’t suggest any immediate cutback in spending just yet but signs of stress are apparent. The global technology major’s revenues grew 23 per cent to $6.7 billion year-on-year in the fourth quarter. However, sequentially, the tech major’s revenues have declined by 0.5 per cent while the financial services sector has shown a 4.8 per cent contraction in the fourth quarter, explains Nirmal Bang’s Harit Shah. A big cause of concern for Indian IT services companies is the contraction in the financial services sector. This vertical accounts for 43 per cent and 35 per cent of the total revenues of TCS and Infosys, respectively. Given that this quarter will only reflect the very initial signs of a slowdown, analysts believe the next segment to come under pressure would be discretionary spends.
According to recent interactions Standard Chartered Securities has had with the Infosys management, the company has admitted to the first signs of slowdown becoming visible in the banking and financial services vertical. Says Pankaj Kapoor of Standard Chartered Securities: “While there is no spend freeze unlike 2008-09, Infosys is seeing a volume downtrend among BFS clients. Also, while there are no abnormal rate cut demands, realisation could see pressure, as clients are pushing volume consolidation and/or offshore migration.”
While depreciation of the Indian currency may help shore up margins in the short-term, the benefit is not significant enough to merit an upward revision in target prices or to precipitate a rally in these stocks. A report on the sector by HSBC Global Research has also not factored in any benefit from the rupee’s depreciation (from 44 to 47) and margin levers such as lower variable pay.
The report maintains that demand momentum remains uncertain for 2012, as the macro data coming out of the US and Europe have been deteriorating quickly. Despite concerns over the financial services vertical and weak macro-economic scenario, analysts are not rushing just yet to downgrade a 10-15 per cent top-line growth forecast for the sector.
