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Earnings preview: Most brokerages see muted December quarter for IT sector

Most top brokerages see investors looking at demand outlook for calendar year 2018, besides industrialisation of digital services and Indian IT's participation in that

Pranati Deva  |  New Delhi 

IT, IT Sector

For Indian (IT) companies, the October-December quarter of 2017-18 (Q3) is expected to be a muted one, weighing on their overall revenue performance. Though demand and revenue acceleration during the quarter could provide some optimism, implications of the US tax reforms and potential changes to the visa rules in that country remain an overhang.

Investors are now likely to focus on demand outlook for calendar year 2018 and, more importantly, industrialisation of digital services and Indian IT’s participation in that. For 2018 earnings, they would also look to margin outlook and the IT budget trend going forward.

Return of cash to shareholders is also in the spotlight, with Tata Consultancy Services (TCS), Infosys, Wipro, HCL Tech, Hexaware, and eClerx all resorting to share buybacks to make better use of their cash balance.

Most brokerages estimate muted revenue growth for Tier-I companies in the sector like TCS, and Wipro, while mid-tier ones are expected report higher growth, powered mainly by a ramp-up in deals won.

Here is what top brokerages expect from IT companies’ Q3 reports:

Motilal Oswal Securities

The brokerage expects top-tier companies in the sector to grow 0.9 per cent to 2.5 per cent on a quarter-on-quarter basis, led by Tech Mahindra. Tier-II companies could witness some revenue decline due to a combination of furloughs and lumpiness in its design-led manufacturing segment, says.

The margins performance is expected to vary as wage hikes become due for a few companies this quarter.

Valuations could drive preference for and Tech Mahindra among the top-tier companies, though the clearing of the air on several issues around would be key in determining the path forward.

Kotak Securities

Revenue growth for the sector in the December 2017 quarter is likely to be soft, in line with the seasonal trend, says. The brokerage expects margins to be flat or higher on a sequential basis for India’s IT companies. Tier-I IT companies should be able to offset the adverse impact of furloughs on margins through operational efficiencies.

A margin expansion of 0 to 25 bps is anticipated for Tier-I Indian IT companies. Among others, Tech Mahindra and could report a strong EBIT margin expansion of 90-140 bps, largely driven by improving profitability of subsidiaries and non-recurrence of one-time costs, respectively.

Reliance Securities

The brokerage expects a stable performance on the margin front, despite seasonal weakness owing partly to the rupee’s depreciation against key currencies and partly due to operational efficiencies and automation. Among top-tier IT firms, Tech Mahindra is expected to post a margin expansion of 69 bps (QoQ). It could be followed by Infosys, with a 53-basis-point expansion. TCS, and HCL Technologies are likely to see range-bound margins.

expects 1.9 per cent sequential revenue growth for IT firms. On a year-on-year basis, growth is likely to remain in a single digit, at 4.2 per cent, with the exception of KPIT (12 per cent), as the IT sector continues to get affected by disruptive trends, increasing competitive intensity and pricing pressure.

Angel Broking

3QFY2018 results be driven by seasonality and hence will be muted as compared to the results posted in 1HFY2018. We expect top-tier companies to grow 0.9-2.5% QoQ during the quarter. The companies, which will post growth towards the higher end of the range, will be and Tech Mahindra. The growth during the quarter was driven by volume, as exchange rates did not change as much QoQ. On the cross-currency front, while in the past two quarters, companies benefitted from cross-currency tailwinds, we perceive minuscule cross-currency effect during the quarter.

On the margin front, the margins are exoected amongst the large caps, to be more or less flat to negative. Only company to post margin improvement will be Tech Mahindra.

In terms of guidance, investors will look at Wipro’s 4QFY2018 guidance, and comments from the new CEO, and TCS’ commentary on BFSI and Retail.

First Published: Wed, January 10 2018. 12:10 IST