IT industry likely to register strong numbers in September quarter

Falling rupee, revival in spending by BFSI and retail segments set to boost revenue

As the second quarter (quarter ending September 30) results of FY19 kick-starts next week, Indian information technology majors are expected to show strong growth in numbers. This could be backed by uptick in spending in sectors such as banking, financial services and insurance (BFSI), retail, and telecom, which were going through turbulence in the past few quarters.

Analysts and experts tracking the sector believe that Indian IT firms are expected to witness one of the strongest quarters in recent times in the Q2 of FY19. Additionally, the strong growth posted by global rivals in Q4 ended August 31 has also rekindled hopes of a better show by the domestic firms.

According to IIFL Institutional Securities, Indian IT companies are expected to see continued acceleration in revenue with significant margin tailwinds (+120 bps QoQ), backed by the depreciating rupee.

“Our interactions with various managements suggest healthy momentum for IT players, reaffirmed by the recent Accenture results. We expect sector revenues to grow at 3.1% (CC, QoQ), partially offset by 50 basis points cross-currency headwinds,” said Rishi Jhunjhunwala, Research Analyst at IIFL, in the report. He, however, said that cross currencies would present a lower headwind than the average change in rates, as a large part of the cross currency movement occurred at the end of the first quarter itself.

Except for the financial services segment, all of Accenture’s verticals witnessed strong growth with consulting growing at 12 per cent and outsourcing growing at 9 per cent, going by the company’s just ended quarter numbers. With most IT players suggesting bottoming out of BFSI and retail vertical woes in the June quarter, Indian IT firms such as Infosys and TCS, which have strong exposure to the BFSI segment, are expected to post strong growth.

According to Srinivas Rao of Deutsche Bank Research, though one per cent depreciation in the rupee value translates into 25 bps improvement in EBIT margin for the likes of Infosys and HCL, and 12.5 bps for TCS, the eventual impact would depend on company-specific strategies with regard to tactical reinvestment and hedges. He added that Infosys could use some of the gains to provide a higher compensation to contain employee churn, which peaked to almost 21 per cent in the June quarter. 

While communications is a small vertical for TCS, the growing interest in 5G technology is expected to translate into some software business for the IT behemoth. This is also expected to be reflected in the management commentary, post the earnings. IIFL forecasts that the recent deal announcements by Tech Mahindra in the telecom space is expected to raise the company’s revenues by 1.8 per cent in the constant currency term.

Wipro completed one major deal with Alight HR Services as well as sold off its data centre business to Ensono, both of which are expected to impact revenue.

IDFC Securities estimates the average dollar growth of Indian IT firms to be in the region of 1.5 per cent to 2 per cent on QoQ basis. “We expect companies such as Infosys, TCS, HCL Technologies and Wipro to record sequential dollar revenue growth of 1.8 per cent, 1.9 per cent, 1.4 per cent, and 0.7 per cent, respectively. 

TechM would see a negative impact in the enterprise segment (led by healthcare) but the recovery in the communications vertical should offset the impact,” said IDFC analyst Rumit Dugar.

 

Buoyant phase for sector

• Dollar term growth of IT firms expected to be 2-3%
• BFSI, retail expected to drive growth owing to revival in client spending
• Expenditure on 5G tech expected to boost telecommunications revenues
• Benefits from depreciating rupee expected to be reinvested into business
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