Mixed bag seen for IT services firms

Analysts see TCS topping, Infy lagging peers; outlook expectations for FY15 awaited

The performance of the Indian information technology (IT) services sector during January-March 2014, the financial year’s fourth quarter (Q4), is likely to be a mixed bag.

Most large companies are expected to show a 2-3.5 per cent quarter-on-quarter (QoQ) growth in revenue, amid appreciation of the rupee, seasonal weakness and company-specific issues.

Tata Consultancy Services (TCS) is likely to continue being the top performer. Infosys, the second largest, is likely to show a marginal decline or tepid growth. Wipro’s performance is expected to converge with those of peers.

“The results are likely to be mixed, with seasonal softness (slower decision making on ramp-up of new projects at the start of a new year),” brokerage firm IDFC Institutional Securities said in a note. “We expect the commentary to be positive, on the back of a healthier demand environment for IT outsourcing.”

The brokerage company estimates sequential revenue growth of the top five IT firms to be in 2.5-3.5 per cent, barring Infosys, which it sees posting a tepid 0.3 per cent rise.

On similar lines, Religare Institutional Research expects most IT companies to have revenue growth of two to three per cent, with Infosys posting a 0.3 per cent sequential decline.

The expectations from Infosys have dipped after the company’s management said last month that weakness in client spending continued through the quarter. It also said it saw “unanticipated project ramp-downs and cancellations” in Q4, and faced “challenges in skill mismatches”, which might lead to meeting only the lower end of its annual revenue growth forecast. For FY14, the Bangalore-based company had given an expectation of 11.5-12 per cent growth here.

Additionally, Infosys has seen a slew of senior-level exits over the past six months, which some analysts believe is harming the relationships with clients.

On margins, analysts do not expect much sequential movement for most IT services companies, due to limited currency movement. However, some companies could take a hit due to salary increments. Analysts estimate Infosys would forecast a seven to nine per cent revenue growth for FY15.

“Ebit (earnings before interest and tax) margins are likely to remain stable,” Anand Rathi Shares and Stock Brokers said in a pre-earnings note. “The average currency realised rate for Q4 is going to be very similar to that of Q3, giving room for companies to maintain their margins at the same levels as last quarter. Also, in the absence of other headwinds during the quarter, barring Tech Mahindra (which will book wage rises during the quarter), we expect companies to maintain their margins at Q3 levels.”

Investors will remain watchful of companies’ outlook for FY15, as there was mixed commentary over recent months. While some of the large entities had a bullish demand environment, many others have said decision making by clients was still slow. Additionally, comments about currency management will be key, after the rupee recently reversed direction.

“We expect management commentaries to reflect cautious optimism on the return of IT spend in the US, increasing adoption of outsourcing in Europe and overall pick-up in the large deal pipeline,” said IDFC Institutional Securities.
WHAT TO EXPECT IN MARCH QUARTER

• Most large companies to post 2.0-3.5% sequential growth in revenue
• Margins seen stable QoQ
• Slow decision making by clients at start of the year to impact books
• Appreciation of the rupee to have a marginal impact

WHAT WILL BE LOOKED FORWARD TO

• Forecast/commentaries for FY15
• Comments on demand outlook
• View on currency
• Decision on salary rises