The fourth quarter of the fiscal is a weak period seasonally for the Indian IT services industry and major companies like TCS, Infosys, Wipro and HCL Technologies are likely to record a sequential revenue growth in the range of 1.5-2.5% for the period. A marginal uptick in demand from verticals such as BFSI and retail is expected while the operating profit margins also may also move up.
The higher growth pegged for the Indian IT majors comes after a tepid performance in the third quarter of FY16 impacted by the long holiday season and the Chennai floods, which are absent for the fourth quarter. Added to this, the markets will watch out for commentary from the companies on the demand outlook especially the annual revenue guidance from Infosys.
Kotak Institutional Equities in its preview report said, “Seasonal weakness will reflect in modest 1.5-2.5% sequential constant-currency revenue growth of Tier-1 ITs. Margins will improve for most companies after Chennai floods-led decline in the December quarter.” It remarked that the 2% depreciation in the rupee will also help the IT majors.
ICICI Securities in its report expects HCL Tech to post the fastest growth at 3.5% sequentially on constant currency (CC) basis with Infosys and TCS to be in the range of 2.5%. It expects Wipro to record 4.4% growth in CC which includes the benefits of acquisitions like Health Plan and Cellent.
The fourth quarter is largely seen as a period where the IT budgets of the clients are decided and companies reworking their growth plans based on the demand being generated.
However, during the fourth quarter of FY16, there is a expectation that the operating profit margin (OPM) is likely to see an improvement primarily due to the depreciation of the rupee against the US dollar and it is likely that it would mitigate the impact of cross-currency movements.
According to ICICI Securities, margins are expected to expand by 80 basis points for all the large cap companies given the tailwinds of rupee depreciation of 2% on a quarter-on-quarter basis.
Added to this, there is likely to be the positive impact from certain operational efficiencies.