March quarter earnings of IT companies seen meeting street expectations

Written by fe Bureau | Mumbai | Updated: Apr 5 2014, 00:25am hrs
Even after some cautious comments on the quarterly numbers by Infosys and TCS in the recent past, IT service providers are expected to report in-line earnings in a seasonally weak last quarter of the fiscal. While rupee appreciation towards the end of three months to March 2014 and wage hikes for certain players are expected impact margins, the earnings outlook for fiscal 2014-15 is likely to stay stable on the back of robust demand recovery ,especially from the US.

Various estimates peg the tier-I IT players to report an average sequential dollar revenue growth of 1.8% to 2.3%. While HCL Tech is seen leading the pack with a robust qoq topline growth of 3% to 3.4%, Infosys earnings are likely to remain flat. Most companies other than Infosys are seen reporting a compression in the EBIT margins largely owing to INR appreciation. In case of Tech Mahindra, analysts expect wage hikes and hedging related losses to impact quarterly margin anywhere between 115 to 180 basis points (bps).

The Indian rupee on average recorded a sequential marginal gain of 0.3% against the dollar during the quarter but showed a strong recovery of nearly 2% in the month of March.

As per Nomura, for every 1% appreciation in the rupee theoretical EPS ( earnings per share) impact on IT companies ranges from 1.5% to 2%. The brokerage house reckons that the focus during the march quarter results would be on two key questions the first being if the companies indicate better growth in FY15 to counter consensus concerns on rupee appreciation. The second question in focus would be How much leeway do companies have to counter INR appreciation it added in a preview note.

Most analysts see the IT companies commentary on demand outlook gaining crucial importance in the wake of the rupee appreciation of the last one month which has impacted the stock prices of most IT players. The top four IT companies which handsomely outdid the Sensex gains (9%) in 2013 by average gain of 70%, have lacked the market in 2014. The turnaround in rupee and a rotation towards cyclical sectors ahead of the election weighed on their performance given that on average they have gained 2% in the year so far against a more than 6% increase in the 30-share benchmark.

Bank of America Merrill Lynch expects companies to remain cautiously optimistic for the fiscal due to market share gains in continental Europe and segments like IT infrastructure and application outsourcing. Pick up in discretionary spending is also seen supporting this view.

However, likely cautious revenue guidance by Infosys could weigh. We wouldnt rule out a 7 to 9% FY15 USD rev growth guidance by Infy vs. consensus/us at 10%, the brokerage noted in a recent report.

J P Morgan which expects Infosys to guide for below industry, 6-8% USD revenue growth for FY15, also believes that odds are against TCS for recording better revenue growth in the fiscal compared to FY15. The brokerage recognizes that TCS's exit growth- implied growth in annualizing 4QFY14 revenue- going into FY15 at 4.5% is lower than that for FY14 ( at 5.1%).

Thus, ask rate is stiffer now (TCS needs 5%+ Q/Q revenue growth in June and Sep quarters) but the company believes this is possible, it in a preview note.