Q2 numbers for IT players sees strong growth; outlook will be key

TCS seen leading the pack; Infy Sikka's comments in focus, Wipro's guidance eyed

After several quarters of scattered growth, the recent uptick in demand and strong deal flow are expected to lead all the tier-I Indian information technology (IT) services companies to post robust growth for the July-September 2014 quarter (Q2FY15), as against their performance during April-June 2014 (Q1FY15).

In line with several earlier quarters, the country's largest IT services player Tata Consultancy Services (TCS) is seen leading the pack in Q2FY15, closely followed by HCL Technologies. Company-specific issues are likely to continue dragging the performance of Bangalore-based IT majors, Infosys and Wipro.

"As is the norm, TCS will likely lead the constant-currency quarter-on-quarter (QoQ) revenue growth," US-based financial services firm J P Morgan said in a note. The firm expects TCS to post at least 5% sequential growth in revenue during Q2FY15. "Infosys should have a better Sep-14 quarter (Q2FY15) than Jun-14 quarter (Q1FY14) (constant-currency revenue growth)...We expect Wipro to do better than turn out another quarter of "well-below-median of revenue guidance band", which has been a feature of its revenue print in the past three quarters."

Infosys, which is scheduled to announce its Q2FY15 earnings on October 10, 2014, will be focus as the Street awaits the company's newly appointed Chief Executive Officer Vishal Sikka to share his plans and strategy for bringing a turnaround at the company. Most analysts believe that Infosys will retain its revenue growth guidance for FY15 at 7-9%. However, Credit Suisse sees a possibility of the company narrowing its guidance range.

"With relatively soft Q1FY15 growth (at 2% QoQ) on a weaker base, it will need to see a 2-4% CQGR (compounded quarterly growth rate) for the remaining three quarters to meet the lower and upper end of the guidance," Credit Suisse said in a note published on Tuesday. "We believe that the historical seasonality pattern (of first half growth significantly better than that of second half) may be less pronounced this year for Infosys."

Viju K George of J P Morgan said, the Street is already bracing for Infosys to remain close to the lower-end of its annual revenue growth guidance.

Wipro, which surprised investors with a strong revenue growth guidance of 1.7-4.0% for Q2FY15, is not only expected to meet the target but also share an equally robust growth guidance for Q3FY15, on the back of healthy order booking and demand from key geographies, analysts said.

According to the companies' websites, TCS will announce its Q2FY15 earnings on October 16, 2015, and Wipro will detail its quarterly results on October 22, 2014.

Cross-currency headwinds are likely to put some pressure on the revenue performance of most IT services players during Q2FY15, analysts said. According to analysts Anantha Narayan and Nitin Jain of Credit Suisse Securities Research, with 3% depreciation in the Euro-Dollar rate and around 1% depreciation in the British Pound and the Australian Dollar, cross-currency headwinds could be in the range of 30-80 basis points sequentially during Q2FY15.

While visa costs weighed on the margins of all IT services companies during Q1FY15, salary increments might pull down margins for HCL Technologies and Wipro in Q2FY15. However, since Infosys and TCS affected wage hikes during the first quarter, the margins of the two companies are seen rising sequentially.

Ankita Somani, research analyst at MSFL Research estimates TCS and Infosys to post a sequential growth in margins of 17 basis points and 27 basis points, respectively in Q1FY15. But, Somani expects, margins for Wipro and HCL Technologies to decline by around 100 basis points and 77 basis points, respectively.

"After a quarter of margin decline across the board, outlook on sustainable profitability and levers to offset potential currency risks will be keenly watched," Somani said in a note published on Wednesday. "With factors such as rupee depreciation, absence of visa costs and annual wage increments of many companies behind, Indian IT companies are going to benefit on the operating margin front during the quarter."

In the mid-sized IT services pack, revenues are expected to expand sequentially with better operating performance as well as sequentially higher other income, analysts said. Mindtree is seen as the best-positioned tier-II services firm, while Tech Mahindra is also expected to perform strongly in Q2FY15.

IT in Q2FY15

* Strong demand seen aiding all large-size players

* TCS seen leading; HCL Tech close second

* Company-specific issues may drag Infy, Wipro

* Cross-currency headwinds could take 30-80 bps hit

* Wage hikes to drag margins of HCL Tech, Wipro

* Margins of TCS, Infy seen rising marginally

* Investors look forward to Infy CEO Sikka's comments

* Mindtree, Tech Mahindra in focus amid Tier-II players

* Street will look at trend on discretionary spends