IT earnings: Seasonal uptick likely in Q1

No big positive surprises expected: Analysts

With another earnings season round the corner, performance in the June quarter (Q1 of financial year 2015-16) of Indian information technology (IT) services companies would be keenly watched. Especially after the better-than-expected show by global peer Accenture in the December-February period.

Accenture also competes with large Indian players like Tata Consultancy Services (TCS) and Infosys. It showed broad-based growth in key markets in its second quarter, ended February, signalling an uptick in discretionary spending.

However, experts believe Indian IT outsourcing companies might not be able to spring much of positive surprise, though they are expected to show seasonal improvement in the quarter ending June.

Among the tier-I suppliers, TCS is expected to lead the pack, followed by Infosys, HCL Technologies and Wipro. Tech Mahindra is expected to lag the larger peers, in line with its recent disclosure that some seasonal weakness in its mobility business and rise in visa costs would weigh on revenue in the quarter.

“We see limited potential for positive surprises in Q1 earnings. Consensus estimates and our forecasts are already factoring in a sharp pick-up in revenue, aided by a stable demand environment and seasonality. We expect dollar revenue to grow by zero to four per cent for companies in our coverage universe, with a cross-currency impact of 10-30 basis points,” Diviya Nagarajan, an analyst with UBS, said in a note.

“We expect dollar revenues of the top five Indian IT vendors to grow by 2.6 per cent quarter on quarter (QoQ) and 7.6 per cent year on year (YoY) in Q1. Excluding Tech Mahindra, we expect the revenue growth to be three per cent QoQ and seven per cent YoY,” said a report from equity analysts ICICI Securities. “This is broadly in line with the QoQ growth of 2.8 per cent and 3.4 per cent for the top four vendors in Q1 of FY14 and FY15, respectively,” its analysts Kuldeep Koul and Bhrugesh Parsawala wrote in the report.

Among the Indian IT pack, TCS’ performance has been largely stable and consistent. The business confidence level of its top management has always remained high as compared to the rest of the sector. In a recent analyst meet, the management team  had shown confidence in maintaining the growth rate. In the longer term, the company had said it was well-positioned to tap opportunities in the digital space.

For Infosys, while the entry of Vishal Sikka has instilled a new confidence, it has not been much reflected in financial performance so far. In Q1, it is expected to show dollar revenue growth of around three per cent QoQ, almost in line with a required compounded quarterly growth rate of 2.8 per cent to achieve the lower end of its revenue growth forecast (for the year) of 6.2-8.2 per cent.  

While HCL Technologies is expected to continue with its growth journey, Wipro is expected to show softness. The cause is continued weakness in the oil & gas segment, as well as a client-specific issue within the banking, financial services and insurance segment. “We expect (Wipro’s) dollar revenue growth to be 0.5 per cent QoQ against the guidance (forecast) for revenue growth of minus 0.5 per cent to plus 1.5 per cent provided by Wipro at the end of Q4 of FY15,” the ICICI Securities report said.

On the margin front, the price increases effected by most of the firms during the past quarter and the rise in visa costs are expected to weigh on their profitability. A depreciating rupee is expected to offset some of this. HCL, which follows a different wage hike cycle, is expected to get full benefit of the rupee depreciation, seeing a margin improvement.

WHAT TO EXPECT FROM TOP INDIAN IT FIRMS

• TCS: Strong revenue growth, backed by healthy volume growth; confidence of management on growth outlook; employee attrition to be closely watched
   
• INFOSYS: Revenue growth to be slightly above expectation; margin might erode after wage hikes, visa costs; attrition could go up due to seasonality; firm expected to make inorganic play during coming quarter
   
• WIPRO: In-ine growth via oil & gas segment continues to be weak; margin to be under pressure; manage-ment commentary to be watched
   
• HCL TECH: In line revenue growth led by infra services; improvement in operating profit margin; management commentary expected to remain stable on growth outlook