IT preview: Lower revenues likely to offset rupee gain

December is generally a weak quarter for the IT industry and most analysts expect biggies like Infosys to adhere to the lower end of their guidance during the quarter. For CLSA, that would mean around 3.5 percent revenue growth for Infosys while Wipro could see a growth of around 1.8 percent towards the middle of their guidance.

[caption id=“attachment_172753” align=“alignleft” width=“380” caption=“CLSA estimates TCS would report a growth of 3 percent in its dollar revenue while for HCL Tech the number could be around 2 percent. Reuters”]  [/caption]

CLSA estimates TCS would report a growth of 3 percent in its dollar revenue while for HCL Tech the number could be around 2 percent. However, the brokerage estimates a significant improvement in the margins thanks to a weak rupee. While TCS and Infosys are expected to improve their margins by 270-295 bps (100 bps=1 percent), for Wipro and HCL Tech the improvement would be less spectacular at 55-80 bps.

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Emkay estimates Infosys to report a 3.7 percent rise in revenue over the last quarter while TCS could report a 3 percent rise in their dollar revenue. IDFC assesses around 2-4 percent revenue growth for this quarter in dollar terms for the top 4 IT companies, TCS, Infosys, HCL Tech and Wipro.

But the guidance for the next financial year, that is, 2013 will be more closely watched. Some firms could even avoid specific number guidelines for the next year as the budgeting process is ongoing for many firms.

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Going ahead, the outlook might not be too positive for the next year. CLSA in another report on the IT sector called “Currency Reset” says IT stocks in India have already gained in the last 18 to 24 months and valuations do not look attractive anymore. Though the margins would not be under any threat due to a weak currency, the 20 percent devaluation in the past six months has not been as significant as the 50 percent devaluation in 1991-92 that created the IT market in India.

Even though the Indian IT space does not face any stiff competition unlike other export-oriented markets like textiles, gems and jewellery etc, their market share is unlikely to go up drastically.

Cognizant, Wipro and HCL Tech have already hinted at passing the benefits from the rupee depreciation to clients through price cuts. But the demand scenario is unlikely to change as the smaller players have always given a 5 to 10 percent bigger discount as compared to the biggies.

Nomura is also cautious about the sector as revenue growth could fall drastically in 2013 . But they are bullish on the weak rupee resulting in a 15 percent growth in earnings per share.

CLSA has upgraded Infosys to Buy with target price of Rs 3,080, while Nomura has reiterated “Buy” on Infosys, Cognizant, HCL Tech and IGate.

However, the bottom line is that a 20 percent devaluation in the rupee is not enough to inflict confidence into the sector which requires a more conducive business environment and faster decision making. Till the global economy stabilises to generate enough order volumes, most IT stocks in India could provide limited upsides.