IT companies? Q3 earnings likely to see muted growth

As global markets move at a sluggish pace, resulting in industry-wide slowdown in IT spend, the third-quarter earnings season of the $100-billion Indian software-services industry, which kicks off on January 11, is in for a muted performance. Brokerage houses tracking the sector expect slow volume growth of 2-3% and about 100-120 basis points decline in margins among country?s top-tier IT firms.

The October-December period is traditionally considered the weakest quarter for the IT sector in a fiscal owing to lower billing days due to the holiday season. With economic recovery in its major markets still a distant dream, the sector is not expecting a distinct turnaround.

?Given the current uncertain environment, we expect volume growth of tier-I Indian IT companies to scale down to sub-12% in FY13. The BFSI industry, from which IT companies derive maximum revenue, is expected to be a laggard in terms of growth,? said Angel broking adding that for the third quarter volume growth to be impacted due to Hurricane Sandy in the US and furloughs seen in the banking and financial services space.

Furloughs is a temporary unpaid leave of some employees due to special needs of a company. At an analysts meet last month both Tata Consultancy Services (TCS) and Infosys pointed out that for the quarter ending December, performance is likely to be impacted by less number of working days and furloughs.

?Volumes for the top 4 companies are expected to rise by 2-3%. While there is a seasonal impact, slower growth in discretionary spends and continued delays in spending decisions have likely continued to impede revenue growth,? said Dipen Shah of Kotak Securities. ?A key factor to watch out for would be commentary on customers? 2013 IT budgets and on 2013 growth prospects relative to 2012,? noted Anantha Narayan and Sagar Rastogi, analysts with Credit Suisse, adding that the December quarter is likely to be subdued.

According to JP Morgan IT budgets excluding BFSI is expected to remain at least flat if not ?marginally higher? in CY13. ?Management commentary on pricing environment needs watching as Infosys has turned aggressive on pricing to drive volume growth. We would watch for movement in constant-currency billing rates for large IT players and also for commentary on changes in competitive landscape due to pricing,? notes JP Morgan.

Analysts feel Ebitda margins will be under pressure due to lower billing days, wage revision in case of HCL Technologies and Infosys and promotions at Wipro. ?We expect flattish to 110 basis points (bps) sequential decline in Ebitda margins. Year-on-year Ebitda margin will be under pressure except HCL Technologies despite about 200 bps benefit from rupee depreciation. TCS is likely to report 260 bps and Infosys 550 bps decline in Ebitda margin y-o-y,? said Kotak.

The last two quarter results for the FY13 revealed a very mixed picture among the top-tier software services companies with TCS and HCL Technologies surpassing market expectations while Infosys and Wipro remained in the backdrop. In fact, Infosys went ahead and discontinued its age old practice of providing quarterly guidance while retaining only the annual forecast, citing poor near term visibility.

Among the top-tier IT players, TCS and HCL Technologies are expected to report the strongest revenue growth. ?TCS will once again lead the industry with sequential revenue growth of 3.1%. HCL Technologies is likely to report strong revenue growth of 2.9%, courtesy the front-ended nature of revenue from certain large deals,? noted Kotak, adding that it expects dollar revenue growth of 1.8-3.1% for tier-1 IT players.

According to Angel Broking dollar revenue growth for the top-tier firms are expected to grow ?moderately? by 2.2-3.2% sequentially. However, there is not much expectation from Infosys, which seems to have lost a certain sheen in terms of meeting the market expectation. With delayed decision making and near-term challenges, Infosys? revenue growth target of 5% for FY13 could be at ?risk?, Barclays said in a report released last month. Barclays has cut its full-year growth forecast for the software services major to 3.8% from 5%.

IT major Infosys will announce December quarter results on January 11, followed by TCS on January 14 and HCL Technologies on January 17 and Wipro on January 18.