Brokerages bullish on IT sector outlook for this year

Leading foreign brokerages are bullish about the earning potential of domestic IT majors like TCS, Infosys and Wipro saying that the outlook for 2014 is positive despite tepid results that could be seen in the first quarter.

While Barclays is overweight on the sector, Credit Suisse said it has positive outlook for the full year.

"While the March quarter is likely to be seasonally slow, Infosys' recent cautious stance and TCS' muted indications have prepared investors for this and we do not anticipate any negative surprise," Credit Suisse research analyst Anantha Narayan said in a report.

"We expect most companies to sound reasonably positive on the outlook for 2014. The cross-currency movement should also be in a narrow band for the quarter," he added.

There is no specific trend in margins in the January-March quarter. The average rupee value has appreciated marginally so that will not have a significant impact, Narayan said.

Recent cost-cutting measures could help continuing margin improvement at Infosys despite muted growth. Tech Mahindra is likely to be impacted due to wage increases and resetting of one of its contracts with BT, the report said.

Similarly, Barclays expects March quarter results to have a growth divergence for IT service companies with revenue traction for Infosys and TCS lagging that of HCL and Wipro.

"For Infosys, we expect a 0.4% q-o-q decline in dollar revenues with TCS also likely to report a seasonally weak quarter (+2% q-o-q revenue growth). A soft quarter by Accenture also indicated that Q4 may have remained muted for the industry," Barclays said.

However, we believe that demand environment remains strong, which is underlined by the positive commentary from TCS and an increase in revenue and bookings guidance from Accenture. "Within our strategy portfolio, we are overweight on IT services," Barclays' report said.

Barclays expect 2% quarter-on-quarter USD revenue growth for TCS for March quarter. At its quarterly analyst meeting, management highlighted that sequential revenue growth in Q4 FY14 was likely to be weaker than Q3 FY14 due to a decline in rupee revenues.

On currency impact, Barclays said, "We expect the impact of rupee's appreciation on sector EBIT margins to have been minimal given that, on average, the rupee remained mostly flattish during the March-14 quarter."

However, the rupee's sharp appreciation towards end of the quarter could have led to higher-than-expected forex loss for companies such as Mindtree and Tech Mahindra, impacting PAT. We expect a USD 25 mn forex loss for TechM and a USD 5mn loss in case of Mindtree for January-March quarter, it said.