The IT sector is expected to report a steady quarter in this earnings season. Strong deal wins in the first half of the fiscal could partially offset the seasonal impact of furloughs, and the cross-currency headwind could be less severe than in the recent quarters, says a JM Financial results preview.
“We estimate reported USD revenue growth between 1.4 per cent to 3.6 per cent for the Top-5 players and 0.3 per cent-2.8 per cent for the mid-tier IT/ER&D services companies under coverage. Our estimates also indicate a broad congruence in organic growth across companies and stability in margins; the recent reversal in INR trajectory should get visible only in 4QFY19,” the brokerage said.
It said management commentary on 2019 IT budgets is likely to remain qualitatively buoyant, as its channel checks suggested deal wins stayed healthy in the October-December quarter and digital deal sizes expanded. However, it said, a material upgrade to consensus’ USD revenue growth forecasts post 3QFY19 results is unlikely and EPS forecasts could get trimmed on the currency reset while rising macro concerns could weigh on the valuations.
JM Financial said it expects most stocks in the sector to consolidate in the near-term except those with technical triggers such as a potential buy-back.
However, many brokerages expect the IT to post sluggish growth in the Q3 compared to the Q2, which saw revenues and margins of the top IT companies expanding.
The rupee’s appreciation against the dollar towards the end of the quarter can result in forex translation losses for the companies. But the dollar’s strength against other currencies will result in modest cross-currency headwind of 70-80 bps for the IT players.
Brokerages have also raised concerns over tighter visa norms and their impact on sales and cost structure. Tightening of visas norms, which has come at a time when the unemployment rates are at a record low, could potentially impact cost structure in the US or even impact demand fulfilment. Companies have to resort to a mix of subcontracting and offshore/nearshoring to meet demand. This impacts margins, said Kotak Securities in a report.
Sales slowdown in the sector is cyclical rather than structural due to increasing demand in digital technology. However, ramp-up in large deal wins for most companies is likely to boost growth, Philip Capital said.
"The Q3 is expected to be a soft quarter for the Indian IT companies as there are many holidays in December month in the US. However, the commentary of the companies' management for Q42019 will be important to watch going ahead," said Avinnash Gorakssakar, research head, Joindre Capital Services.
JM Financial said it estimates 0.4 per cent to 2.2 per cent quarter-on-quarter organic constant currency (CC) revenue growth for the Top-5 players in a seasonally soft quarter having furloughs and lower billing days. “We expect the Top-3 players to report comparable USD revenue growth (2.0-2.1 per cent QoQ); Tech Mahindra (2.2 per cent) should be similar and HCL (3.6 per cent) could be an outlier due to a higher inorganic contribution (H&D and Actian acquisitions + a new IP licensing),” JM Financial said.
A TickerNews Services report said its sample of top five software services exporters show revenue growth of 2-4 per cent while profit seen rising around 1-3 per cent.
On the revenue front, HCL Technologies is expected to lead the way with a growth of 4.35 per cent on-quarter followed by Tata Consultancy Services (TCS) with 2.49 per cent and Infosys with 2.08 per cent, it said.
The news agency said TCS is likely to report a net profit of Rs 8,178 crore followed by Wipro at Rs 2,352 crore and HCL Technologies at Rs 2,558 crore. Infosys is likely to witness a negative profit growth of -0.85 per cent on-quarter at Rs 4,074 crore, it said.