Subdued Q1 earnings expected for IT cos: Analysts

IT companies are expected to show relatively subdued performance in the April-June quarter due to macro uncertainty and soft demand scenario despite a lift from depreciating rupee, say analysts.

 

Infosys will kick off the first-quarter earnings season for the Indian IT-services industry from July 12, followed by other big boys like Tata Consultancy Services, Wipro and HCL Technologies in the next few weeks.

 

"We expect a relatively subdued performance from the companies under our coverage with volumes for the Top 4 companies are expected to rise by 1-3%. Cross-currency fluctuations will likely impact dollar revenue growth by about 0.5-0.7%. Margins are expected to improve quarter-on-quarter, largely on the back of rupee depreciation," Kotak Securities Head (Private Client Group Research) Dipen Shah said in its IT Results Preview report.

 

He added that Kotak expects about 6% revenue growth in rupee terms (helped by rupee depreciation), while profit after tax growth is seen lower at 3.7% because of forex losses (hedging) and higher taxes in some cases.

 

Indian IT companies benefit on the operating margin front when the rupee depreciates and generally one% depreciation in the rupee leads to a 30-40 basis points increase in the operating profit margin of an IT firm, analysts say.

 

For tier-II IT companies, the depreciation may aid operating margin by 80-150 basis points on quart-on-quarter basis.

 

The overall demand scenario has remained stable over the quarter and while the economies of the US and EU may take long to improve, the stimulus measures taken by them have eased concerns of defaults/bankruptcies and helped them stabilise.

 

This, analysts feel, may prevent demand from falling in the foreseeable future.