Results of tech firms cloud growth hopes

With revenue growth moderating, near term could witness some pressures due to Brexit

As the country’s two largest listed information technology (IT) companies - Tata Consultancy Services (TCS) and Infosys - witnessed soft revenue growth in the June  quarter (Q1), the question to ask is will this trend continue in the foreseeable future.

The pressure points for the sector provide some indication. Although Brexit is a long-term positive for the domestic IT sector, as the UK and European companies will focus on cost efficiency and comply with regulations, leading to more demand, the near-term volatility will reflect in the performance of Indian IT companies over the next few quarters.

While the TCS management said they haven’t seen any impact of Brexit and are watching the events, Infosys said it is not sure how it will play out and it has lowered the forecast. Infosys’ relatively lower exposure to the UK and Europe provides some comfort. Secondly, although TCS has been missing Street expectations on dollar revenue growth for a few quarters, in Q1, Infosys, too, indicated some delay in ramp-up of large deals.

  This is in stark contrast to the healthy uptick in deal wins (in number as well as value) Infosys registered in recent quarters. For TCS, a point to note is that its largest revenue contributor (40 per cent of revenue), the banking, financial services and insurance segment, has seen some volatility in the past few quarters and grown 1.7 per cent sequentially in Q1.

Infosys’ constant currency revenues (adjusted for currency changes) grew 1.7 per cent sequentially and lagged Street estimates of 3-3.7 per cent. More importantly, the management toned down its full-year constant currency revenue growth forecast from 11.7-13.7 per cent to 10.5-12 per cent, citing unanticipated headwinds in discretionary spending, particularly in consulting and package implementation businesses (about a third of revenues).

Weakness in top line growth reflected in Infosys’ operating margins, which fell 138 basis points sequentially to 24.1 per cent, partly due to wage hikes and an unfavourable currency movement. Positively, Infosys maintained its operating margin expectation of 24-26 per cent for this financial year. Amid declining pricing, it is aiming to push automation to grow margins. The company missed Street expectations on revenue, as well as earnings in Q1. This, along with lowering of revenue forecast, saw the Infosys stock fall almost nine per cent on Friday.

Another indication of the sector’s prospects is the expectations from the next set of players. Wipro, the third leading technology company, is expected to continue lagging industry growth as it struggles with company-specific issues and softness in the energy vertical. For HCL Technologies, which also has a good amount of exposure to Europe, revenue growth has defied its attractive deal wins in recent times, indicating some delay in project ramp-ups. The jury is out on these.