We expect the Q1 earnings season to temper revenue optimism, as the financial services vertical is unlikely to register a cyclical acceleration in the quarter and growth in retail remains weak. However, companies could fare better than expected on profitability. This is likely to be on account of: (i) our lateral checks suggesting that annual wage increments are lower and/or staggered compared to last year and (ii) favourable cross-currency (GBP, EUR vs. USD) movement during the quarter. Net net, we expect Q1 earnings season to be a lackadaisical event, with a negative bias for stock movement.
Cyclical uptick in IT spending might not be visible yet
Our recent channel checks suggested that United States banks were in a ‘wait-and-watch’ mode on the topic of raising spending on IT. They await clarity on regulatory changes (like Dodd Frank), the pace of interest rate hikes and taxation. Last week, Accenture lowered the top end of its FY17 revenue guidance (Sept ’16-Aug ’17), sighting: (i) a slower uptick in healthcare and public services, and (ii) a push-out of the expected improvement in IT spending on back of the proposed reforms by the new US government.
Expectations relatively high at Wipro this quarter
Relative to peers, expectations are high at Neutral-rated Wipro after its commentary from last quarter on catching up with industry-level revenue growth by Q4FY17. Hence, any change to the outlook driven by talk about continued weakness in healthcare and energy could weigh on the stock. We expect Q2 revenue guidance of 1.5%-3.5% q-o-q (constant currency — CC). We expect Q1 revenue to decline by 0.8% q-o-q CC and the Ebit margin to expand by 130 bp q-o-q, as the reversal of the one-time impact seen last quarter is partly offset by wage hikes.
Expectations low at Infosys, Tech Mahindra
Amidst a continuing focus on non-business issues, growth expectations appear low at Neutral-rated Infosys. We forecast a softer-than-typical sequential revenue uptick of 2.2% q-o-q (CC) on sluggishness in banking and retail. Visa costs and the rupee should drive the margin down by 90 bp q-o-q. Finalising the buyback/dividend timeline could help the stock. Likewise, after a particularly weak Q4, expectations are low at Tech Mahindra (Underperform). However, Q1 is unlikely to provide a positive trigger. We expect Ebit percentage to expand by only 40 bp q-o-q, as the reversal of one-time costs seen last quarter is likely to be largely offset by visa costs and adverse seasonality in telecom.
TCS, HCLT: Slow Q1; uptick potential from Q2 is key
Intra-quarter commentary from Tata Consultancy Services (Underperform) and HCL Technologies (Buy) also suggests a slower-than-usual Q1. In the case of TCS, it is likely to be impacted by a delayed uptick in financial services spending, while HCL Technologies is likely to be impacted by delayed deal closures in infrastructure services. Thus, the key for TCS is commentary about potential improvement from Q2 on the back of deals in insurance/Diligenta and for HCLT, the normalisation of the deal cycle. We expect the Ebit margin at TCS to dip by 100 bp due to the impact of wage hikes, while HCLT is expected to register a
50 bp q-o-q expansion, helped by operational efficiencies.
—Bank of America Merrill Lynch