To be impacted by slowing spends in BFSI & retail sectors; margins expected to remain steady.
The Indian IT industry is expected to post another round of muted results with the second quarter of the current fiscal impacted largely by the slowing spends in the BFSI and retail sectors, though the margins are expected to remain steady.
The second quarter of the fiscal is traditionally considered to be a strong period for the Indian IT industry but the expected spending uptick in the BFSI sector is yet to happen. Top tier IT players like Tata Consultancy Services, Infosys, Wipro, HCL Technologies and Tech Mahindra are expected to clock a quarter-on-quarter revenue growth in the range of 1.6-4.1% for the September quarter in dollar terms.
“The Q2 earnings season is likely to cement FY18 as a year that did not witness the expected cyclical uptick with spends from major verticals like financial services and retail remaining weak and at least some pockets of the market witnessing slower decision making in the first half of the fiscal amidst the political situation in US,” according to a note by brokerage house DSP Merrill Lynch.
The Indian IT services industry has not witnessed a strong growth in the last couple of quarters as the sector is going through technological shift and events like Brexit and new US visa regulations have not helped.
However, analysts also believe that favourable cross-currency movements will aid growth as currencies like pound, euro and Australian dollar had appreciated against the US dollar. Though the recent depreciation of the rupee against the dollar is unlikely to provide any further relief.
Though the margins are expected to move upward by 20-40 bps due to the lesser visa costs and an increase in local hirings in the US. The impact of wage hikes will kick in from this quarter for companies like Infosys and Wipro. “We expect a mixed performance on the margin front. Among top-tier IT firms, TCS, HCL and TechM are likely to report 40-130 bps rise, while Infosys and Wipro are likely to post 70-80 bps q-o-q decline owing to wage hikes,” stated Reliance Securities in its note. According to Nomura, rupee depreciation is not likely to have a material impact on margins with similar quartterly realisations at 64.6 (compared to 64.4 in Q1).
“While softness in BFSI and retail may sustain on account of lower discretionary spending by big banks and online transition by large retailers, traction is expected to be strong in manufacturing,” wrote Sandip Agarwal of Edelweiss Securities in a note.
The results season will kick off with TCS declaring its earnings on Thursday. Wipro’s quarterly results announcemment is slated for October 17 and Infosys will follow suit on October 24.
Recently, Infosys had appointed Nandan Nilekani as the chairman of the company after R Seshasayee decided to step down following a tussle between the board and the founders led by Narayana Murthy. This will be the first result announcement of the company under the interim CEO Pravin Rao after Vishal Sikka decided to step down.
“An update on the company’s strategic choices appears more essential at this stage to ensure customers continue to engage with the company on important digital initiatives,” stated Merrill Lynch’s Kunal Tayal.
Among the other large players, the revenue growth for HCL is likely to be weak due to delays seen in closure of infrastructure services deals in first half of the year. Analysts say that TCS is expected to grow amidst slow spending in the large verticals of banking and retail due to the growth smaller verticals of utilities, travel and life sciences.
By Pradeesh Chandran