Expect modest Q1 earnings growth from IT companies, say analysts

Written by P P Thimmaya | Debojyoti Ghosh | Debojyoti Ghosh | Bangalore | Updated: Jul 3 2013, 16:13pm hrs
Even as the first-quarter earnings season of the Indian IT-services industry kicks off from July 12 with Infosys, the analyst community is expecting modest revenue growth for the period. Though the sector got a lift from a sharply depreciating rupee recently, it was tempered by the news of technology giant Accenture lowering its revenue guidance, giving strong signals that there is no major uptick in demand.

The market would be looking for cues from various players on the kind of demand outlook while also keeping a watch on the major tailwinds facing these companies. Said Credit Suisse: Given the recent weak results from Oracle and Accenture (especially the latter) and uncertainties due to the proposed immigration reforms, commentary on demand outlook should drive stock performance.

Though Indian IT companies managed to make some gains from rupee depreciation, these were offset by tepid revenues, higher costs and lower utilisation of manpower. The rupee depreciation is unlikely to have any positive bearing on the operating margins, IT experts feel.

For the first quarter of FY14, Religare Institutional Research expects dollar revenue growth to be in the range of 0.5-3.5% for large players. Despite wage hikes this quarter, margins are likely to be stable across large-caps helped by the rupee. The first quarter will not see the entire impact of rupee weakness on margins, but we expect some translation benefits, stated Rumit Dugar and Udit Garg, analysts with Religare. The highest sequential dollar revenue growth is likely to be recorded by TCS at 3.6%, followed by HCL Technologies at 2.6%, Infosys 1.7% and Wipro 0.5%, the Religare report added.

Morgan Stanley in its report said, We expect quarter-on-quarter cost increases for Infosys, TCS and Wipro to be higher than QoQ revenue growth. It said that TCS commentary could indicate a stable but back-ended year for revenues and higher investments in low-margin, large deals to absorb the tailwind of rupee depreciation. In FY14 so far, the rupee has depreciated by a further 5% qoq on average basis and 10% qoq on month-end basis. Maintaining flat EBIT margins for the fiscal despite such a strong tailwind is a priority but an extremely tough task for managements of Indian IT companies.

IndiaNivesh Research noted in its report that for Infosys, the recent rupee weakness relative to global currencies could lead to a 140-basis point (bps) quarter-on-quarter expansion in EBIT margin while TCS is expected to report EBIT margin expansion of 130 bps sequentially.

Wipro's EBIT margin is expected to expand by 90 bps quarter-on-quarter, relatively lower compared to its peers due to cross currency headwinds and the impact of two salaries following the hike.