Cross-currency benefits to boost IT services revenues

Infosys and Wipro to report margin expansion in Q3; HCL Tech may see margins decline on wage hikes

Historically, the December quarter is a weak one for the software services sector for a variety of reasons. So, don’t expect fireworks from the sector this earnings season, as revenue growth in constant currency is likely to be moderate on weaker volume growth. Analysts are unanimous on expectations from the top five players. The top five IT services companies will report a revenue growth of between 1.2 per cent and 3.8 per cent. In the second quarter, the top companies had reported dollar revenue ranging between 2.7 per cent and 5.4 per cent. The Street expects TCS and HCL Technologies to report dollar revenue growth (sequential) of more than three per cent. Infosys and Wipro are expected to see dollar revenue growth of two per cent and below.

This may not be news for many, as the divergence in the performance of the top players has become a norm. Despite this, there is a theme that is expected to give a leg-up to the revenue growth of all players.

The cross-currency movement is expected to impact dollar revenues by 40-50 basis points, claim analysts. In the December quarter, the US dollar depreciated against the pound, euro and the Australian dollar. These three currencies account for about 25 per cent of the revenues of the top five players.

Kotak Institutional Equities expects reported dollar revenue growth of 1.8-3.8 per cent, with 40-100 basis points of cross-currency benefits. IDBI Capital believes Tech Mahindra will likely be the biggest beneficiary of this, while it expects Infosys to benefit the least from this.

Although Infosys and Wipro are not expected to report sector-leading revenue growth, both players are expected to expand margins in the third quarter. Infosys is expected to expand operating margins by 200 basis points sequentially to 26.4 per cent in the third quarter, as it will not be impacted by the one-time visa issue that hurt margins in the second quarter. Wipro also expected to report a margin expansion of 50 basis points to 19.2 per cent. HCL Technologies is expected to see its margins decline by nearly 120 basis points on wage hikes.

Analysts say while operationally there is not much in store this quarter, the management commentary will be critical, as it will set the tone for the next year. Analysts say they will watch out for commentary on the demand environment, deal conversion, budgets for 2014 and pricing trends.