Slow BFSI spending to hurt Q2 performance of Indian IT companies

July-September quarter witnessed strong sequential revenue growth during the period

Weakness in the financial services sector as well as project delays and cancellations could impact the pace of revenue growth of Indian IT companies in the second quarter of the current financial year, says industry analysts.

Traditionally, the July-September quarter is one of the better quarters for the $110 Indian IT sector, witnessing strong sequential revenue growth during the period.

However, with challenges in the banking, financial services and insurance (BFSI) vertical and client specific issues weighing on growth, tier-1 IT vendors like TCS and Infosys are expected to deliver tepid constant currency growth in the second quarter.

"The seasonal strength that leads to strongest sequential growth in the September quarter is hardly expected to play out this time, as slowness in spending by the BFSI vertical weighs on the industry. In dollar terms, growth will be pegged back further by sharp depreciation of the GBP (pound) v/s the US dollar," Motilal Oswal said in a report.

Slowdown in growth, rupee strength and investments will lead to toning down of margin expectations by companies, Kotak Institutional Equities said in its report.

"Second quarter of 2016-17 will be the weakest September quarter for Indian IT in the past eight years. We expect tier-1 IT to report constant currency revenue growth rate of 0.5to three per cent quarter-on-quarter. We forecast cross currency headwind of 50-100 bps for tier-1 IT due to depreciation of GBP," it said, adding that the firm expects some cut in growth guidance.

Analysts are also of the view that the sector's growth in FY2017 will be constrained by broad-based weakness in the BFSI vertical, elongated decision cycles given macro uncertainty and a weak pipeline of large deals and likely lower discretionary spending.

"We see FY17 to remain a challenging year both on growth and margins," Centrum said.

Country's largest software services player Tata Consultancy Services (TCS) has already warned that its financial sector clients in the US are holding back on discretionary spends, leading to a "sequential loss of momentum".

Infosys has also hinted that it might slash its revenue guidance for the second time this financial year, stung by "risks" like challenges in the banking and financial services sector and cancellation of projects.

Smaller rival Mindtree had made similar comments saying its revenues in the second quarter are expected to be lower than the first quarter, impacted by cross-currency movements, project cancellations and slower ramp-ups in a few large clients across different verticals.

However, industry body Nasscom has so far maintained that there is no immediate reason to revise the 10-12 per cent revenue growth forecast in IT exports for 2016-17.