Information technology: Q4 results show growth acceleration theory was a myth

IT sector’s Q4 results have brought a much needed reality check, with almost every large IT company failing to report any major acceleration in growth

As far as the March quarter results go, organic growth for large companies was tepid on a sequential basis, ranging between 0.5% and 2%. Photo: Bloomberg
As far as the March quarter results go, organic growth for large companies was tepid on a sequential basis, ranging between 0.5% and 2%. Photo: Bloomberg

For some reason, investors in Indian information technology (IT) stocks believed at the start of the year that 2018 will be far better for the industry, compared with the previous one. The sector’s Q4 results have brought a much needed reality check, with almost every large firm failing to report any major acceleration in growth. In fact, based on the results, some large firms are likely to report a deceleration in growth in financial year 2018-19.

For instance, Cognizant Technology Solutions Corp. is expected to report a deceleration in growth this year after adjusting for the impact of favourable cross-currency movements and acquisitions. HCL Technologies Ltd and Wipro Ltd, too, are expected to report deceleration in growth on an organic basis.

Infosys Ltd might grow at a higher pace, although the improvement will be marginal. Only Tata Consultancy Services Ltd stood out, with growth expected to be 2-3 percentage points higher this fiscal, on the back of some large deal wins.

As far as the March quarter results go, organic growth for large companies was tepid on a sequential basis, ranging between 0.5% and 2%. “Constant currency revenue growth stayed depressed at 6.8% y-o-y (versus a near-term peak of 14%). We look for tier-1 IT revenue growth of 8.1 in FY19 (vs 8.2% in FY18F). We are cautious on the possibility of material acceleration in FY19, contrary to consensus,” analysts at Nomura Research wrote in a note to clients.

Mid-sized companies such as Cyient Ltd and Mindtree Ltd did far better on the growth front, and are likely to end up far ahead of large-sized peers in terms of growth this year. But they continue to have high client concentration, which means risks to investors are also higher.

Besides, companies struggled on the profit margin front, and missed Street estimates in a number of cases. “Margins were flat sequentially, with traditional levers exhausting,” Nomura’s analysts wrote.

All told, IT stocks still enjoy the advantage of the so-called TINA (there is no alternative) factor, with few alternatives in the market that are available at relatively reasonable valuations.