Top tier IT services firms are likely to report 6-8% sequential revenue growth in dollar terms for the second quarter ended September, helped by a sustained demand environment and revival in discretionary spending. Analysts from across brokerages believe the Indian IT services industry is in the middle of a secular demand upturn.
Citigroup forecasts 6-8% q-o-q revenue growth for tier one players like TCS, Infosys and Wipro; Kotak estimates 6-9% revenue growth; IDFC Securities sees them growing at 7-8% sequentially; while Angel Broking expects growth to range from 6.8-7.8% for tier one firms.
?Our positive view on the tier-I Indian IT players is driven by our confidence on the sustenance of strong demand in the medium term. We believe the Indian IT services industry is in the middle of a strong secular growth trend, driven by sustained market share gains versus large global incumbents as well as small local players, and increasing adoption of off-shoring in new verticals and geographies,? Kotak Institutional Equities noted in a report. It expects Infosys to lead the pack of top tier firms in terms of growth in Q2. Citi expects cross-currency to impact revenue growth in dollar terms positively by about 1%. It sees the services sector benefiting from cyclical recovery and seasonal strength because the first half of the year is historically stronger.
A ngel Research said the cross-currency movement, which had proved to be the bane in Q4 of FY10 and Q1 of FY11 impacting dollar revenues by 0.8-1.5% qoq, has turned into a boon in Q2. ?The dollar has depreciated by 3.9%, 1.5% and 2.5% against the GBP, Euro and AUD, respectively. This will aid dollar revenues of tier I companies by 0.5-0.8% q-o-q. The rupee has also depreciated by 1.8% against the dollar, which will result in higher rupee revenue growth and aid operating margins by 60-70 bps,? the brokerage house said in a report. IDFC, in a report released on Monday, anticipated tier-2 companies reporting 4-8% qoq growth. Among the mid-cap companies, it expects Hexaware to report strong 8% growth. Kotak sees mid-sized companies continuing to under perform versus tier-I firms.
Although most analysts see strong revenue growth, margins are pegged to be flat to slightly up because of headwinds such as wage inflation. ?We expect the margin trends to be mixed as there are companies that have absorbed salary hikes last quarter while there are some that will take the impact this quarter. In addition, there will be company-specific issues like promotions (TCS/Wipro) and losses in BPO (HCLT). Cross currency and INR depreciation will be tailwinds as far as margins are concerned,? Citi said.
IDFC noted that EBITDA margins would be largely flat for TCS and Wipro while Infosys would see 170bps increase. ?Among tier-2 firms, EBITDA will be a mixed bag ? notably, HCLT and Mphasis would see 130bps decline while KPIT Cummins would see 170bps increase,? it said. Kotak expects 200 bps margin improvement for Infosys and a modest sequential decline for both TCS and Wipro.