Moderate earnings expected for IT cos in Q3: Analysts

IT aggregate growth expected to moderate to 3.2% q-o-q due to seasonal impacts of lesser working days: Nomura

Seasonal impact of lesser working days and furloughs may result in moderate quarter-on-quarter revenue growth of 2-4% for Indian IT firms like TCS and Infosys in the October-December 2013 quarter, analysts today said.

Traditionally, the October-December quarter is a weak quarter for IT companies as the number of working days is lesser compared to other quarters due to the holiday season at the client locations.

"We expect tier-1 IT aggregate growth to moderate to 3.2% q-o-q, given seasonal impacts of lesser working days and year-end shutdowns/furloughs," Nomura Equity Research said in a report.

It added that while TCS and Wipro are expected to lead the tally in terms of USD revenue growth, Infosys is likely to lag. The quarter is expected to be decent for Cognizant, HCL Technologies and Tech Mahindra.

The earnings season will be kicked off by Infosys announcing its numbers for October-December quarter on January 10, followed by HCL Technologies on January 16 and Wipro on January 17. Tata Consultancy Services (TCS) is yet to announce the date.

According to Angel Broking, volume growth in the quarter will be impacted by lesser working days, furloughs across industries and lower spending in verticals like retail, manufacturing and in services like consulting and enterprise solutions.

With the rupee appreciating marginally (on average basis), the revenue growth in rupee terms could get negatively impacted and trim down the operating margins of IT players by 0-10 basis points q-o-q.

For Q3 FY2014, in rupee terms, revenue growth is expected to be in the range of 1-3% q-o-q for tier-I IT firms and 0.5-2.7% q-o-q for tier-II companies.

IT analysts remain confident of the sector doing well in the following quarters.

"We believe IT services demand is likely to continue to improve in FY2015 led by a better macroeconomic growth outlook. Preliminary discussions with IT companies and clients indicate that IT budgeting cycle for CY2014 is expected to begin on a positive note with signs of improvement in economic activities," Angel Broking said in its report.

Increasing offshore penetration in Europe and pick-up in discretionary spend in the US geography as well as demand for new technologies ie Social, Mobility, Analytics and Cloud is also likely to drive demand, it added.

Healthy pick-up in spending in key markets of North America and scope for accelerated market share gains in Europe can support about 15% growth for the industry, which in turn can satiate the growth appetite of all players and reduce pricing pressure, Kotak Institutional Equities said.

"We will watch for commentary on the outcome of clients' budgeting cycles to assess the strength of the demand environment and its sustainability," it added.