Earnings preview: Expect moderate show from IT sector in Q3

Seasonal impact of lesser workingdays and furloughs may result in moderate quarter-on-quarterrevenue growth of 2-4 percent for Indian IT firms like TCS

and Infosys in the October-December 2013 quarter, analyststoday said.

Traditionally, the October-December quarter is a weakquarter for IT companies as the number of working days islesser compared to other quarters due to the holiday season atthe client locations.

“We expect tier-1 IT aggregate growth to moderate to 3.2percent q-o-q, given seasonal impacts of lesser working daysand year-end shutdowns/furloughs,” Nomura Equity Research saidin a report.

[caption id=“attachment_1178367” align=“alignleft” width=“380”]  TCS and Wipro are expected to lead the tally in terms of USD revenue growth, Infosys is likely to lag.[/caption]

It added that while TCS and Wipro are expected to lead thetally in terms of USD revenue growth, Infosys is likely tolag. The quarter is expected to be decent for Cognizant, HCLTechnologies and Tech Mahindra.

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The earnings season will be kicked off by Infosysannouncing its numbers for October-December quarter on January10, followed by HCL Technologies on January 16 and Wipro onJanuary 17. Tata Consultancy Services (TCS) is yet to announcethe date.

According to Angel Broking, volume growth in the quarterwill be impacted by lesser working days, furloughs acrossindustries and lower spending in verticals like retail,manufacturing and in services like consulting and enterprisesolutions.With the rupee appreciating marginally (on averagebasis), the revenue growth in rupee terms could get negativelyimpacted and trim down the operating margins of IT players by0-10 basis points q-o-q.

For Q3 FY2014, in rupee terms, revenue growth is expectedto be in the range of 1-3 per cent q-o-q for tier-I IT firmsand 0.5-2.7 per cent q-o-q for tier-II companies. IT analysts remain confident of the sector doing well inthe following quarters.

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“We believe IT services demand is likely to continue toimprove in FY2015 led by a better macroeconomic growthoutlook. Preliminary discussions with IT companies and clientsindicate that IT budgeting cycle for CY2014 is expected tobegin on a positive note with signs of improvement in economicactivities,” Angel Broking said in its report.

Increasing offshore penetration in Europe and pick-up indiscretionary spend in the US geography as well as demand fornew technologies ie Social, Mobility, Analytics and Cloud isalso likely to drive demand, it added.Healthy pick-up in spending in key markets of NorthAmerica and scope for accelerated market share gains in Europecan support about 15 percent growth for the industry, whichin turn can satiate the growth appetite of all players andreduce pricing pressure, Kotak Institutional Equities said.

“We will watch for commentary on the outcome of clients’budgeting cycles to assess the strength of the demandenvironment and its sustainability,” it added.

PTI