Margin fall highest for TCS in June quarter

The impact on Infosys, Wirpo and HCL Tech would be in the range of 60-90 basis points

Among the top Indian IT majors, TCS is expected to bear the brunt of the rupee’s appreciation, wage increases and visa costs with its operating profit margins (earnings before interest and taxes or Ebit) falling the most on a sequential basis in the June 2017 quarter.

While Rishi Jhunjhunwala of IIFL pegs the company’s Ebit margin compression at 260 basis points, Sandip Agarwal and Pranav Kshatriya of Edelweiss Securities believe the margins of India’s largest software exporter would fall by 150 basis points. In the case of TCS, more than 70 per cent of the higher costs are accounted for wage hikes, though some of the margin pressures are partially offset by higher realisations and cost rationalisation. Infosys, Wipro, HCL Technologies and Tech Mahindra, too, are expected to face margin compression in the range of 60-90 basis points.

Analysts expect seasonal margin pressure in the June quarter led by visa costs and wage hikes to be further accentuated by 3.9 per cent quarter on quarter (q-o-q) rupee appreciation against the dollar. They also expect a negative impact on margins due to higher local hirings, though its impact is expected to gradual.

On the revenue front, slower than estimated spending on the financial services vertical is a dampener. Bank of America Merrill Lynch analyst Kunal Tayal expects revenue optimism to be tempered in the June quarter as the financial services vertical is unlikely to register a cyclical acceleration in the quarter while growth in the retail vertical remains weak. Tayal believes the US banks are in a “wait-and-watch” mode on higher IT spends as they await clarity on regulatory changes (like Dodd Frank), the pace of interest rate hikes and taxation. 

On the back of acquisitions, HCL Technologies is expected to post a 4-4.2 per cent q-o-q dollar revenue growth, while the other companies, barring Wipro, will see growth of 1.5-2.8 per cent. Wipro is expected to post flattish to marginal fall in growth. Given rupee appreciation against the dollar which acts as a headwind, cross-currency gains would offset the stronger rupee a bit. Appreciation of the pound, euro and the yen against the dollar has a 40-90 basis point positive impact on revenues. 

The companies’ guidance for the rest of the year is key as they had already highlighted that the June quarter will be soft given the regulatory overhang of financial services space in the US. The other key areas which the Street will keep an eye out are the growth in digital services, IT budgets of clients and pace of local hiring.