Lower volumes, margins to hit IT firms' earnings in Q4

Infy's revenue likely to grow most; TCS could top in net profit growth

Pressure on earnings/margins, owing to cross-currency headwinds and modest volume growth, are likely to be key trends for Indian information technology (IT) majors for the quarter ended March. Sequential revenue growth is estimated at 1.1-3.4 per cent, primarily driven by volume growth, given the somewhat flat realisations. While operating margins could be hit by 50-90 basis points, net profits are estimated to be under pressure — these could range from a fall of 5.4 per cent to a rise of 2.8 per cent.

To gauge the prospects of these companies, the Street would closely monitor managements’ estimates for FY14, as well as large deal wins. Recently, IT stocks have seen a rise on expectations FY14 would be good for the sector. Analysts remain positive on the sector, given the reasonable valuations and the improving US macroeconomy.

“BSE IT is up 20 per cent year-to-date, outperforming the Sensex by 24 per cent. Valuations are now mid-cycle (16.5 times the one-year forward price/earnings ratio and a 15 per cent premium to the Sensex), suggesting easy gains are over. But we believe an upside is still there, with an improving business trajectory. Any dip on the results front could be a good buying opportunity,” says Surendra Goyal, IT analyst at Citigroup. He adds Infosys and HCL Tech are his top picks in the sector.

For the quarter ended March, Infosys is likely to lead on the revenue growth front.

TCS could outperform its peers in net profit growth. The company is likely to post three to four per cent sequential volume growth for the quarter. While a one-time employee settlement payment would drive margin erosion, the company’s realisations would take a hit due to the British pound’s depreciation against the dollar. However, modest wage increases for the full-year would provide a cushion to the margins. Comments on regulatory and discretionary spends would be key monitorables.

It is uncertain whether Infosys would continue to give full-year estimates. Analysts believe if it does provide an outlook, the revenue growth estimate for FY14 is likely to be 10-12 per cent (including the Lodestone acquisition), while the estimated rupee earnings per share could be Rs 170-175. For the quarter ended March, a large part of the company’s revenue growth is likely to be organic, with Lodestone contributing one per cent.

Onsite wage rises, promotions and the India business process outsourcing and Finacle businesses (which have been volatile in recent quarters) would be closely tracked. Analysts expect the stock to be re-rated to 16 times one-year forward price/earnings ratio (against the current 14 times), owing to deal wins and volume growth.

Wipro is likely to beat the lower end of its March 2013 revenue outlook. Analysts expect its revenue growth estimate for the quarter ending June to be two to four per cent. The company has seen a pick-up in large deals and added some large clients (accounting for revenues of about $100 million). For improved visibility, the company has to continue seeing these trends. The company’s telecom segment and the management’s views on additional investments would be watched closely.

HCL Technologies would see the hardest impact of cross-currency headwinds, owing to the fact that the company’s exposure to the British pound is the largest among large-cap companies. Higher selling and general expenses would add to the margin pressure. The company is among the key beneficiaries of an improvement in discretionary spending. The deal pipeline, pricing and volume outlook would be closely tracked.