The first quarter results for FY16 of top-tier Indian IT services companies are unlikely to throw up any good surprise, as the twin factors of wages hikes and higher visa costs are likely to put pressure on operating profit margins, according to brokerage houses.
The first quarter results for FY16 of top-tier Indian IT services companies are unlikely to throw up any good surprise, as the twin factors of wages hikes and higher visa costs are likely to put pressure on operating profit margins, according to brokerage houses. Also, revenue growth is expected to be modest.
The April to June period is traditionally stronger for the Indian IT industry, but this time there are mixed signals. There is a favourable movement on the cross currency front but overall growth forecast for the sector has been reduced. “We expect incrementally positive commentary on the state of demand even as June-15 print may not excite by itself going by normal June standards,” JP Morgan said in its note.
According to the brokerage houses, sentiment of tier-I IT players may turn optimistic given the positive macroeconomic data points from the US. However, there may be a lag in spending on IT by one or two quarters.
The top-tier Indian IT companies – TCS, Infosys, Wipro and HCL Technologies — ended FY15 on a more subdued note and their forecast did not evoke optimism as the macroeconomic indicators were relatively unstable due to falling oil prices and the Greece debt crisis. “We expect revenues to revive, after across-the-board decline in 4QFY15. The revival is partly a result of FX headwinds subsiding QQ from 250-300bps last quarter to 15-30 bps in 1Q. Also, 1Q receives support from being a strong quarter seasonally,” brokerage house CLSA said.
However, there is no expectation that any of the top-tier IT firms would post revenue growth higher than 5% on a sequential basis during the quarter. Credit Suisse in its note said, “In this seasonally strong quarter for most companies, we expect the IT firms to report revenue growth in the range of -1.3% to 4.2% on an organic basis, with TechM at the lower end and TCS at the upper end.”
Similarly, Kotak Institutional Equities said, “We expect Indian IT to report (1)-4% USD revenue growth in June 2015; cross-currency would be a tailwind but negligible (<20 bps except for Wipro at 80 bps).” It added that there would company specific challenges like exposures to verticals such as telecom, energy and BFSI.
The operating margins of tier 1 IT companies are expected to be under pressure due to wage hikes and higher visa costs which could be anywhere in the range of 275-300 basis points, though this would be offset by favourable cross-currency movement and depreciating rupee. The margins are expected to remain more or less stable with some small declines.
On company specific growth expectations, JP Morgan said, “TCS to lead on revenue growth, while TechM and Wipro to report soft quarters.” It expects TCS to register 4% sequential growth in dollar terms, while for Infosys it would be 2%.