With September quarter results just round the corner, experts believe corporate revenue growth will double year-on-year, aided by some demand recovery and the low base effect. "Demand recovery is expected to be driven by discretionary, consumption-led sectors such as airline services, automobiles, fast-moving consumer goods (FMCG) and retail," says Prasad Koparkar, senior director, Crisil Research. Meanwhile, IT companies are expected to showcase divergent trends on the back of a range of factors from seasonal gains, typical for some leading IT companies during the second quarter, to coping with cross currency headwinds.
Retail, FMCG and automobiles, Crisil says, will benefit from the low base effect caused by the rollout of the Goods and Services Tax in the second quarter of 2018. Makers of steel and aluminium will benefit from improved sales realisation. Cement manufacturers, it says, will be helped by higher volumes. However, airlines, automobiles, aluminium and cement will bear the brunt of rising cost of raw material.
The Crisil note, which is a preview of Q2FY19 results, is based on its analysis of 365 companies (excluding those from banking, financial services, insurance and oil sectors). The rating agency expects corporate revenue growth in Q2 to nearly double year-on-year to 12.1 per cent. On the flipside, the cost pressures are clearly on the rise, it says. The rupee's fall against the dollar will prop revenue growth, it says, for the export -linked sectors, especially IT and pharmaceuticals. But then, the dollar has appreciated against other currencies also. Analysts, therefore, expect Q2 results for IT sector to get impacted by cross currency factors apart from other elements.
"Despite the seasonal strength and macro tailwinds in the US (including impact of tax reforms, for instance, will increase spending by companies in the US), we foresee a divergence in the performance of large cap IT. We expect revenue growth of 0.8-3.7 per cent (organic, CC (constant currency), QoQ - quarter-on-quarter) with Infosys leading peers and Tech Mahindra lagging them," says Sudheer Guntupalli of Ambit. He shares some company-specific expectations. Some of them are on the following lines:
TCS, including most IT companies, will be watched out for the cross-currency influences. Factors that could have played a part in the growth numbers would include the seasonality component, recovery in the crucial BFSI segment apart from retail and telecom. Factors such as revenue growth, rupee depreciation and productivity gains, and any increase in the share of digital revenues are all expected to impact margins. The company's commentary on key verticals, and any revision in aspirational operating margin band will be watched out for.
Infosys too will be watched on cross currency fac,tors. Though the gains from the typical seasonality gains in Q2 coupled with recovery in BFSI and retail, could help. Factors impacting the margins would include strong revenue growth, compensation hike to the remaining 15 per cent of workforce (subsequent to wage hikes in Jun-18), rupee depreciation and intensity of sub-contractor expenses and G&A investments. Key things to watch out for will be any revision in annual revenue growth and margin guidance, and outlook on recovery in key verticals like BFSI and retail.
Wipro, like others, will be seen for the cross currency headwinds. The elements impacting growth, Guntupalli feels, would relate to the divestment of hosted data centres business, excluding the contribution from hosted data centres. Pointers that could impact margins would be the wage hike impact for two months and the rupee depreciation. Things to watch out for would be revenue growth guidance for Q3FY19 and the outlook on HPS, India and Middle East businesses.
HCL Technologies will also be watched on the cross-currency influences. The factors that would have a bearing on growth would include the seasonality component, inorganic contribution from the recent IP partnership (estimated to be 0.7 per cent). "We do not factor in any inorganic revenue from H&D International for this quarter. While the acquisition of Actian was completed with effect from July 15, 2018, we do not factor in any revenue (quarterly run-rate of ~US$23mn) as it was structured as a Joint Venture with Sumeru Equity Partners (SEP)," says Guntupalli of Ambit. He sees an impact on the margins on account of top performer wage hikes and rupee depreciation. What needs to be watched out for would be the company's commentary on the acceleration in organic growth, outlook on IMS and any further IP partnerships.
Tech Mahindra also has some cross currency elements to be seen closely. On the growth front, one needs to look at its strength in communications and implementation cycles in enterprise coming off. The factors impacting margins include wage hikes, absence of visa costs and rupee depreciation. What needs to be watched out for would be the company's outlook on 5G spend, communications and margin expansion.