The third quarter of the fiscal is seasonally a weak period for the Indian IT sector with holiday season and a general slowness in the business...
The third quarter of the fiscal is seasonally a weak period for the Indian IT sector with holiday season and a general slowness in the business, but this time there was an additional impact of the Chennai floods which is likely to see companies like TCS, Infosys, Wipro and HCL Technologies record a flattish or negative revenue growth coupled with a fall in operating profit margins.
The floods in Chennai made the biggest impact for the large Indian IT services companies as all of them have significant presence in the city and most of them have already given a warning on the revenue and profits. HSBC in its preview note on the results said, “It’s well acknowledged by the street that 3Q is likely to be a weak quarter impacted by the double whammy of lower working days/furloughs and Chennai floods. We expect nearly flat growth sequentially (+/- 1% on reported basis) and 50-120 basis points (bps) margin impact across most companies.”
In case of TCS, which has got its largest development centre in Chennai, the expectation from Kotak Institutional Equities is that it would register a constant currency revenue growth of 1% after taking an impact of 60 bps from Chennai floods. The scenario is similar across other companies also such as Infosys, Wipro and HCL Technologies, where the revenue growth estimates are estimated to be around plus or minus one per cent. It is very unlikely that there would be any major upside on revenue or profit front. The third quarter revenue growth projections comes after a modest second quarter growth in the fiscal, where Infosys was the only stellar performer with 6% sequential growth. Besides, the tepid revenue growth expectations, the operating profit margins of the big four Indian IT services companies are expected to be impacted on an average by 70-80 bps largely due to one time costs associated with Chennai floods and cross currency movements.
This, though, is likely to be mitigated by the depreciating rupee. Citi Research in its note said, “Margins remained under pressure across the board in 2QFY16 vs same time last year despite 8% rupee depreciation, suggesting that consistent profitable growth is becoming difficult for the sector.”
In the case of Infosys, the note from Kotak expects its EBIT margin to decline by 125 bps which besides the Chennai floods impact, predicts pressure from investments and pricing. At the same time, the announcement of the third quarter results is also expected to set the platform for growth projections during 2016 especially in light of the slowness in demand pick-up and greater shift towards digital business. HSBC in its note said, “More important than the 3Q performance will be the commentary on 2016 IT budgets and FY17 growth outlook based on contract signings (TCV) in 3Q.”
The brokerage house further stated that the key themes which will drive demand in FY16 will be: demand upside from digital; impact of growing multi-dimensional competition; macro-economic outlook & its impact on BFSI spending.