Wipro, Infosys, TCS: What their earnings mean for the IT sector

Shares of Wipro tumbled almost 7 percent on Wednesday after the company missed street expectations with over 8 percent fall in net profit for the first quarter ended June and forecast that IT services sales would grow less than 1 percent in July-September. At 1:37 pm, the stock was trading at Rs 533, off lows but still down 3 percent. The Sensex was up 0.3 percent and IT index down 0.09 percent. [caption id=“attachment_2904346” align=“alignleft” width=“380”]  Reuters[/caption] On Tuesday, the company recorded an 8.3 percent on-quarter fall in net profit to Rs 2,052 crore. Its revenue declined 0.3 percent on quarter to Rs 13,698 crore. Reliance Securities, meanwhile, notes that this is the 16th successive quarter of single digit on-year dollar revenue growth onsite and the 20th successive quarter offshore, implying a structural issue. There is nothing cheer about the results, it says. Considering this is the third major earnings from the Indian IT space, here are three takeaways for the sector: All-round weakness in IT sector: Wipro is the third largest IT services company in India. The company’s results on Wednesday come after its larger two rivals published earnings last week, which too negatively surprised the markets. And so as Religare analysts Rumit Dugar and Saumya Shrivastava say in their post-earnings note: “The weakness in the sector is now clearly visible with another large-cap putting up a poor show.” This has major repercussions for job creation in the sector. The reason for the weakness is that the transformation the sector is undergoing in order to adjust to the new technological advances. Bloomberg columnist Andy Mukherjee noted after the Infosys and TCS results: Profitability is now capped by robots, or, to be more specific, a combination of artificial intelligence, digital technologies, blockchain and other innovations that are challenging the traditional strategy of throwing people at complex software problems and charging clients for their time. Margins are a big problem: Wipro’s operating margin came in at 23.88 percent, lowest in 18 quarters. Brokerage Emkay Global notes that the company’s IT services EBIT margin has fallen about 290 basis points in the last four quarters. This quarter the number stands at 17.8 percent, down 190 bps on quarter. The reasons for the decline are wage hikes, full-quarter consolidation of acquisitions, changes in reporting related to amortization of acquisitions, slight headwinds in the India and Middle East business and certain investments in client relationships, says Emkay. For Infosys and TCS too margins have been a problem. Mukherjeee in his column notes that “the new normal for operating margins for both Infosys and TCS may be around 25%, and not the (earlier) 29% to 31%”. A quick turnaround unlikely: Nobody sees a quick turnaround. “While (Wipro) management expects growth and margins to pick up in H2FY17, we do not anticipate much change in the situation,” say Dugar and Shrivastava of Religare. Manik Taneja and Ruchi Burde of Emkay also do not expect any major shift. “Management’s initiatives to transform Wipro across several dimensions will continue to involve significant investments across dimensions and might keep overall FY17 performance muted,” they said in the note. They see single-digit growth for the company this year. Brexit is on ‘top of the mind’ for Wipro. “In the medium term, Brexit could delay some discretionary spend and create some slowdown in the European Financial Services sector,” Abidali Z Neemuchwala has said. According to him, the biggest impact is going to be on currency. No IT company is immune to currency volatility. Karan Taurani of Daulat Capital had told CNBC-TV18 after the Infosys earnings that impact of Brexit will more on the company than others. “In terms of going ahead in quarter two, we expect some kind of recovery in growth but the Brexit impact will be major for Infosys because they have had about 4 percent growth in the last four quarters on an average from the European markets. European markets have outperformed the US market for Infosys, so going ahead you might see some kind of negative impact because of Brexit on Infosys specifically,” he told he TV channel. In short, the three IT earnings reveal continuing pain for the sector for some more time. Data inputs from Kishor Kadam