New Delhi - Weakness in the financial services sector as well as project delays and cancellations may impact the pace of revenue growth of Indian IT companies in the second quarter of the current fiscal, say industry analysts.
Traditionally, the July-September quarter is one of the better quarters for the $110 Indian IT sector, witnessing strong sequential revenue growth during the period.
However, with challenges in the banking, financial services and insurance (BFSI) vertical and client-specific issues weighing on growth, tier-1 IT vendors such as TCS and Infosys are expected to deliver tepid constant currency growth in the second quarter.
"The seasonal strength that leads to strongest sequential growth in the September quarter is hardly expected to play out this time, as slowness in spending by the BFSI vertical weighs on the industry. In dollar terms, growth will be pegged back further by sharp depreciation of the GBP (pound) v/s the US dollar," Motilal Oswal said in a report.
Reliance Securities says the British pound has depreciated by over 9 percent against the dollar (quarterly average).
"There is likely to be a 45-141 bps adverse impact on reported USD revenue growth owing to this factor, with Wipro & HCL Technologies (HCLT) likely to be affected the most," it said in a pre-earnings note.
Slowdown in growth, the rupee's strength and investments will lead to toning down of margin expectations by companies, Kotak Institutional Equities said in its report.
"Second quarter of 2016-17 will be the weakest September quarter for Indian IT in the past 8 years. We expect tier-1 IT to report constant currency revenue growth rate of 0.5-3 per cent quarter-on-quarter. We forecast cross currency headwind of 50-100 bps for tier-1 IT due to depreciation of GBP," it said, adding that the firm expects some cut in growth guidance.
Relaince Securities, meanwhile, feels it is likely to be the weakest ever 2Q for TCS, and Wipro in terms of sequential dollar revenue growth.
"Factors like SMAC (Social, Mobility, Analytics and Cloud), leading to revenue cannibalisation, challenging macro, high competitive intensity and pricing pressure will sustain and we expect these factors to impact growth over the next few quarters as well," it said.
Analysts are also of the view that the sectors growth in FY2017 will be constrained by broad-based weakness in the BFSI vertical, elongated decision cycles given macro uncertainty and a weak pipeline of large deals and likely lower discretionary spending.
"We see FY17 to remain a challenging year both on growth and margins," Centrum said.
The country's largest software services player Tata Consultancy Services (TCS) has already warned that its financial sector clients in the US are holding back on discretionary spends, leading to a "sequential loss of momentum".
Infosys has also hinted that it may slash its revenue guidance for the second time this fiscal, stung by "risks" like challenges in the banking and financial services sector and cancellation of projects.
Smaller rival Mindtree had made similar comments saying its revenues in the second quarter are expected to be lower than the first quarter, impacted by cross-currency movements, project cancellations and slower ramp-ups in a few large clients across different verticals.
However, industry body Nasscom has so far maintained that there is no immediate reason to revise the 10-12 per cent revenue growth forecast in IT exports for 2016-17.