Preview: Expect no fireworks from IT in second quarter

Indian IT companies are likely to have witnessed an on-quarter increase in revenue during July-September but there’s no reason to expect major surprises in their earnings, various brokerages have said.

“We expect limited growth surprises, with: 1) discretionary demand continuing to be soft and 2) large revenue contributors like BFSI and telecom continuing to be sluggish,” said Nomura in a pre-earnings note.

BRICS sees delayed project starts and pricing pressure also impacting the second-quarter earnings of the IT firms.

[caption id=“attachment_485842” align=“alignleft” width=“380”] The companies’ comments on outlook will provide the momentum for their shares, analysts say. Reuters[/caption]

Wage increases are likely to result in a fall in margins during the quarter, traditionally considered good for the outsourcing industry.

“We expect margin declines for most of the companies in Q2 - primarily due to wage hikes,” Citi said in a note.

On the margins front, Nomura expects Infosys to fare better with a 70 basis points increase on quarter as against flattish trends at TCS. Wipro and HCL Technologies are likely to witness an 80-170 basis points fall due to wage hike impacts.

Nomura expects companies to sound cautious on margins in the light of the recent rupee appreciation.

Analysts, however, do not expect the companies to be affected by the rupee’s appreciation during the quarter.

The rupee has appreciated to 52 against the dollar from a low of around 57, after the government unveiled a slew of reforms.

“While IT companies in general have not materially gained from INR depreciation on margins, we anticipate adverse impacts if INR were to appreciate,” said Nomura.

“INR should not be a big swing factor in Q2 but could start weighing on margins Q3 onwards if the recent INR trend sustains,” concurs Citi note.

However, any changes in market shares are will be keenly watched.

Nomura expects market share-focused players to continue to lead the dollar revenue growth.

It sees HCL Technologies dollar revenue rising 4.1 percent and that of Tata Consultancy Services 4.2 percent.

Infosys is likely to see a lower growth differential in 2Q (at 3.2% on quarter), with Wipro likely being the worst of the lot (at 1.8 percent on quarter)," Nomura said.

What to watch out for

The companies’ comments on outlook will provide the momentum for their shares, analysts say. Trends on budgets, decision making, discretionary spend and pricing will be keenly monitored, according to Citi.

Especially for Infosys and Wipro, any commentary on deal wins/ pipeline will keenly watched, Nomura said.

The market hoping for a double-digit revenue growth for these companies in FY14, Nomura said.

However, HSBC has said Accenture has increased its focus on outsourcing to offset the slowdown in management and IT consulting business. The company is eating into the market share of Indian software services companies, it said.

“… The sector is facing changing contours of growth, whereby the structural market share-led growth would continue to slow down,” it said in a pre-earnings note.

In 2013-14, the brokerage expect the sector to grow 12 percent as against the market expectation of 15 percent.

Infosys guidance cut?

There has been speculation that the appreciation of the rupee is likely to prompt Infosys to cut its guidance for the year.

However, analysts are divided on this.

BRICS expects Infosys to cut rupee revenue growth guidance by 4.5 percent, while Nomura sees the company to cut only EPS guidance by 2 percent to Rs 163.

Barclays, however, expects the company to revise the revenue guidance upward.

“We estimate Infosys’s FY13 revenue growth guidance of 5 percent y/y could be upgraded by 1.5 ppts (percentage points) on the back of the Lodestone acquisition,” it said.

Core growth guidance is likely to remain unchanged despite 4.2% q/q revenue growth, it said.

Most of the analysts expect Infosys to fare better on quarter.

“On the bottom line, Infosys could fare better, in our view, from hedging gains given substantial reduction in forward premiums on hedges over the last quarter and the company’s accounting policy of marking to market all hedging gains/losses every quarter and taking it to the P&L account,” Nomura said.