The results season will kick off on Thursday, with the country’s largest IT exporter, Tata Consultancy Services (TCS), declaring its financial results for the third quarter of the current financial year.
The results season will kick off on Thursday, with the country’s largest IT exporter, Tata Consultancy Services (TCS), declaring its financial results for the third quarter of the current financial year. While the performance of the IT sector is expected to be muted, all eyes are on the future guidance that the industry leaders will share. According to brokerage HDFC Securities, the IT sector is expected to be impacted by seasonality in the third quarter and there will only be mild revenue acceleration. It has projected that the top tier IT companies will grow around 1.2% on a sequential basis in Q3. “Operating performance is expected to be stable despite seasonal headwinds supported by increased automation and higher efficiencies. We expect IT sector aggregate EBITDA percentage at 22.5%, down 20 basis points QoQ,” wrote Apurva Prasad, senior analyst – institutional equities, HDFC Securities.
The period between October and December is typically a weak quarter for the Indian IT industry due to the holiday season and slowing of the business momentum. Among the top tier companies, HDFC Securities expects TCS to lead on operational performance, while Infosys and HCL Technologies are expected to lag. Within the midcaps, Persistent and Majesco are seen posting the highest sequential revenue growth. Other brokerages seem to share the similar view. “We estimate 1%-1.8% organic constant currency revenue growth for tier-I Indian IT. We expect muted revenue growth for tier-I players due to the usual end-of-the-year furloughs and continued softness in BFS and North America,” Kotak Institutional Equities said in a report.
On the margins front, companies are likely to be able to hold on, largely due to their internal efficiencies. “We expect margins to be broadly stable as seasonal weakness will offset cost savings, automation and pyramid rationalisation initiatives,” said Sandip Agarwal, an analyst with brokerage Edelweiss. TCS got a big boost recently with a $2.25-billion IT outsourcing deal from Nielsen. The major focus, however, will be on Infosys which recently witnessed the entry of the new CEO, Salil Parekh. CLSA in a recent note said, “Infosys has been able to maintain growth rates similar to peers despite significantly higher internal sources of distraction over the last year, which reiterates the quality of its client relationships.
The choice of CEO suggests management attrition is unlikely.” A stable management team can limit the gap with peers even as the business turns around from self-help over 2018, it added. As the third quarter results come at the beginning of the calendar during the budgeting cycle by most of the clients, the forecast for the next quarter is one of the key factors to be monitored. The impact of the changes in the US tax policy is also a key metrics which is expected to be shared by the management of various IT companies. Besides this, the management commentary on digital engagements would be another factor to watch.
‘India Inc top line growth to hit 5-year high of 9% in Q3’
Ahead of the start of the earnings season, rating agency Crisil on Wednesday said it expects India Inc’s revenue growth to hit a five-year high of 9% for the October-December 2017 period, reports PTI. However, profits will continue to contract, primarily due to rising commodity prices, Crisil said. The aggregate top line of companies in key sectors will grow 9% over the same period last year on higher realisations in the steel, aluminium, cement and crude oil-linked sectors, and a pick-up in consumption-driven sectors such as auto and aviation, Crisil’s research wing said.
“EBIDTA margin fell for 8 of 21 sectors in the second quarter of this fiscal, and we expect this trend to continue. A contraction of 1-1.30% in aggregate EBIDTA margin in the third quarter would intensify pressures because there’s little latitude to control cost amid rising commodity prices,” Crisil director Hetal Gandhi said.