IT majors set to record appreciable growth

As client budget for IT spend starts rolling out during the first quarter of the current fiscal, the $86 billion Indian software exports industry is expected to end the April-June stretch on a positive note. The country’s top-tier IT-services companies are projected to record a strong top-line growth; however, margins are likely to decline sequentially due to annual wage hikes and visa expenses during the June quarter. 

Analysts tracking the sector expect large-cap IT players to post sequential dollar revenue growth in the range of 1.5-5 percent, with TCS and HCL Technologies leading the pack.

According to estimates by multiple brokerage houses, TCS is projected to report sequential dollar revenue growth in the range of 4.5-5 percent, followed by HCL Tech at 4 percent. Infosys is expected to record a growth of 1.8-2 percent while Wipro is projected to post in the range of 1-1.5 percent. The IT earnings season kicks off on July 11 with Bangalore-based Infosys announcing its quarterly results.

During the January-March period, Noida-headquartered HCL Technologies posted the highest revenue growth at 3 percent among the top four Indian IT firms followed by Wipro at 2.5 percent. TCS recorded a top-line growth of 1.9 percent for the March quarter while Infosys had a 0.4 percent sequential decline in dollar revenue impacted by sluggish business in some of its key verticals.

Analysts point out that during the April-June stretch, a seasonally strong quarter for the industry, the overall demand environment has remained stable. Even IT spending has “recovered” in verticals, including retail and manufacturing, which were a “drag” in the previous quarter.  

According to brokerages, operating margins of the top four IT firms are expected to go down in the range of 100-225 basis points (bps) sequentially hit by about 3 percent appreciation of the rupee against the US dollar during the quarter. Wage increments and higher visa costs, which are typically incurred in April when visa applications are filed, will also be a deterrent.  

“Profitability of Infosys, TCS and Wipro is expected to decline by 11 percent, 7.7 percent and 7.5 percent quarter-on-quarter while HCL tech is expected to have almost flat sequential net income as the company has not given any wage hikes which is a major headwinds for operating margins for its peer companies,” said Ankita Somani, IT analyst, MSFL Research.  

During the fourth-quarter earnings call, Infosys indicated that salaries, promotions and investments in new visas will impact the June quarter (Q1) margins by approximately 250-300 bps.

Earlier considered as an indicator of the IT industry’s overall performance, Infosys has failed to meet the upper end of its revenue outlook over the last few fiscals. Infosys saw its revenue growth rate plunging to 5.8 percent in 2013 from 26 percent in 2011.The country’s second-largest IT services exporter, Infosys projected a dollar revenue growth of 7-9 percent in FY15, lagging the 13-15 percent growth expected for the industry.

“Despite the recent management changes at Infosys, we do not expect any major change in the guidance for FY15 by Infosys. We expect the FY15 guidance to be guided by conservatism. Markets will closely listen to the arguments supporting the guidance," says Dipen Shah, head, private client group research, Kotak Securities.

Mumbai-headquartered TCS, at a recent analyst meet, indicated that revenue growth in the first quarter has panned out along expected lines, led by strong growth in Europe. According to Barclays, TCS is likely to see a 340 bps sequential decline in its EBIT margins due to wage hikes and rupee appreciation among other reasons. However, it expects India’s largest IT-services company to report a 5 percent dollar revenue growth quarter-on-quarter.   

According to MSFL Research Wipro’s IT services, EBITDA margin is expected to decline by about 90 bps sequentially due to partial impact of wage hikes, which was effective from June 1. “HCL Tech is projected to witness 105 bps margin contraction due to higher sales, general and administrative (SG&A) expenses,” MSFL Research noted. HCL Tech typically implements wage hikes from July 1. 

With uptick in outsourcing demand, the export-heavy Indian IT sector is likely to see a strong earnings momentum. According to Forrester Research, combined US business and consumer spending on technology is expected to rise 5.3 percent this year to $1.3 trillion.  “We will watch out for comments by company managements on the improvement seen in spending patterns and budgets for calendar year 2014. While, we expect pricing to remain largely stable, we will closely watch the management commentary about their expectations on the same,” said Kotak Securities.