Bet on IT to surprise in Q4: HCL Tech, Infy to lead growth; TechM & TCS likely to falter

NEW DELHI: India’s top five IT companies are likely to post modest sequential revenue growth of up to 3 per cent (in constant currency terms) in the traditionally weak March quarter, but they are expected to present an upbeat outlook for FY17, with some analysts projecting Infosys’ annual guidance to beat even the most optimistic estimates on Dalal Street.

Experts largely expect HCL Technologies and Infosys to lead growth during the March quarter, while Tech Mahindra and TCS are likely to face client-specific headwinds. Cross-currency headwinds may make a 30-80 bps dent in dollar revenues for the fourth quarter of FY16, they said.

While Cognizant and MindTree had given cautious commentaries about delays in discretionary spending in the BFSI space, healthy quarterly numbers from Accenture — on strong digital-related services demand — are sending out all the positive signals.

Infosys is scheduled to report its quarterly earnings on Friday (April 15). TCS and Wipro are scheduled to report their fourth quarter numbers on April 18 and April 20.

“Though the second half of a financial year is generally weak for Indian IT largecaps such as Infosys and TCS, we anticipate modest QoQ revenue growth during the fourth quarter of FY16, given the absence of the Chennai flood loss and one additional day in February,” Edelweiss Securities said in a note.

Expect reasonable revenue growth

Top five IT companies namely TCS (1.2 per cent), Infosys (2.4 per cent), HCL Technologies (2.5 per cent), Wipro (2.3 per cent) and Tech Mahindra (- 0.20 per cent) may report revenue growth up to 2.5 per cent on a quarter-on-quarter basis, Edelweiss Securities said in a note.

In constant currency terms, the brokerage is expecting IT firms to clock between 0.40 per cent and 3 per cent growth for the quarter.

Among other brokerages, Kotak Institutional Equities expects HCL Technologies to lead Q4 growth with at least 2.5 per cent revenue growth in constant currency terms. Infosys may report 2.2 per cent growth, TCS 2 per cent and Wipro 1.5 per cent (organic), it said.

“Seasonal weakness will reflect in modest 1.5-2.5 per cent sequential constant currency revenue growth of Tier-1 IT firms,” the brokerage said.

Margins may expand: Brokerages are expecting IT firms to report better margins for Q4FY16 on account of a depreciation in the rupee and the absence of Chennai floods in the quarter. “Barring Tech Mahindra, we expect Ebitda margins to improve for Indian IT firms. A depreciating rupee and absence of the impact of Chennai floods in Q3FY16 are the key margin tailwinds. At Tech Mahindra, salary increases are a key margin headwind. Despite likely improvement in Q4, we believe margins are a key concern for investors due to pricing pressure in legacy services,” said IIFL Institutional Equities in a note.

“We believe that bulk of the pricing pressure in legacy services has happened in the past year. We do not see margins of Indian IT deteriorating over FY16-18,” the brokerage said.

Kotak Institutional Equities expects 45-65 bps improvement in EBIT margin for Tier-1 firms.

Bullish commentary likely

“While Infosys will give an explicit guidance and reiterate its course to achieve vision 2020, TCS, HCL and Tech Mahindra are likely to issue qualitative statements, implying a better FY17 versus FY16. Optimism in TCS is driven by fading of key drags such as Diligenta, LATAM and Japan. A soaring order book coupled with huge upcoming renewals (USD140-150bn) burnish HCL’s prospects; and the near bottoming out of telecom business will drive optimism in TechM,” Edelweiss Securities said in a note.

“For top tier players, constant currency growth should be quite reasonable, the hedging policy that these companies follow would entail some amount of risk in terms of how the currency would pan out in terms of their EBIT margins getting hit. But again largely that is getting factored in when the numbers start coming around so Infosys, HCL Tech is something we will continue to like,” said Mayuresh Joshi of Angel Broking.

In an interview to ET Now, the expert said he was extremely positive top tier IT names and would remain so over the next two to three years.