IT firms may post poor Q4 numbers as uncertainties remain

Stronger rupee likely to take a toll; Infosys results on April 13 to be keenly watched

Indian information technology (IT) services companies are yet to see growth revival and might report lower numbers for the quarter ending March (fourth or Q4 in 2016-17), as uncertainties continue over a new tax regime in the US and the slowing of traditional business.

The results season will begin with the country's second largest IT services entity, Infosys, announcing its numbers this Thursday.  

Sector analysts say some top and mid-level companies saw growth in some business accounts. And, tier-I companies worked on models to offset a rise in cost due to more local hiring and potential tax changes by Donald Trump in the US. 

These performance improvements of IT companies might, however, get impacted by a rupee which rises against the dollar; it had closed March at 65 to a dollar. Profit is likely to be impacted across companies with these currency headwinds.

Large and mid-size companies are expected to post nil to two per cent revenue growth in constant currency terms on a sequential basis, says brokerage Motilal Oswal. HCL Technologies should, however, see up to 3.4 per cent, with contribution from acquisitions, notes a preview report by the firm.     

“IT vendors to show moderate growth of 0.8 to 3.9 per cent in constant currency terms on a sequential basis, with HCL or TCS (Tata Consultancy Services) leading the pack,” said Madhu Babu, IT analyst at brokerage Prabhudas Lilladher.  

The sector will keenly watch the growth forecasts by Infosys, which is expected to announce a conservative number of between seven and nine per cent. Nasscom, the apex software industry body, has said it expects between eight and 10 per cent for the sector.   

A change in the on-shore business model, with more local hiring, will mean additional cost for Indian IT. “Revenue growth for the industry still remains a challenge, with little, if any, clear signs of acceleration after a tepid 2016...The business model changes at on-site have been underway for a while, and the higher costs have more-or-less been absorbed so far. But, the recent direction of the rupee against the dollar might just end up being an additional headwind to thwart any assumptions of sanguine performance,” said Gautam Duggad, research head at Motilal Oswal.

Indian IT is seeing a transition in the business model as more customers seek service delivery through digital technology such as cloud. This has also resulted in significant reduction in long-term and high-volume contracts. 

Many clients now prefer to spend their IT budgets through a pay-as-you-use model. At the same time, Indian IT companies are seeing a decline in on-premise technology services business, still their core.

"While a few offshore IT Services companies (TCS and Cognizant in particular) did raise expectations on benefits from the improvement in macro post December 2016 quarter results, discussions with industry players in recent weeks months have painted a mixed picture on this front," said brokerage firm Emkay.

"Accenture's commentary however on this front has been encouraging where it not only reported a modest uptick in the Outsourcing segment (the real like to like comparison to Indian techs) in quarter ending February 2017," it said. Accenture reported eight per cent growth in outsourcing revenue, indicating that customers may have begun investing on backend infrastructure -- typically outsourced to Indian firms.

Industry analysts believe returns from the digital technology businesses are not yet enough to offset the drop in traditional business.

"Tier-I companies such as Infosys, TCS, Wipro, HCL Technologies would be better placed to adapt to these changes, given their brand to attract talent, wider reach and war-chest to absorb shocks on a higher margin base. Notwithstanding the regulatory developments, we see greater comfort in the earnings performance at Tech Mahindra, with gradual recovery in telecom," added Duggad.