The third-quarter earnings of IT services companies are expected to show muted revenue growth due to the seasonality of the period, though they are likely to gain from cross-currency benefits, according to brokerage houses.
Traditionally, Q3 is a weak quarter with the holiday season robbing much of December, and IT companies focus more on fresh budgets expected to be announced by clients in the new calendar year. The operating margins of the top-tier Indian IT companies — Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies — are expected to remain almost at the same level as each will have to deal with issues such as cost optimisation, hiring and salary hikes. Also, the rupee has not shown any significant depreciation, which would have aided the profitability.
Kotak Institutional Equities in its Q3 preview said, “We expect Indian IT to report a quarter of weak revenue growth in constant terms due to seasonal impact of holidays and furloughs. However, cross-currency benefits will add sheen to the US dollar revenue growth numbers.” The Q3 earnings season of the $108-billion Indian IT-ITeS industry will kick off on January 10 with Infosys results.
“We expect tier-1 firms to report constant-currency revenue growth of 1.4-3%, with Infosys having a disappointing quarter of revenue growth. We expect US dollar revenue growth of 1.8-3.8%, with 40-100 basis points of cross-currency benefits.”
The key issue would be on how 2014 would unfold as the overall market is showing steady signs of a slow revival, especially from its largest market US.
Prabhudas Lilladher in its report said, “As we enter 2014 calender, commentaries from managements seem to be more assertive and confident on the demand environment. We see some early signs of pick-up in discretionary spends corroborated by management’s commentary. We believe strategic initiatives by the companies would help them improve momentum to 15% plus year-on-year growth in FY15. The strength of demand will be unfolded over the course of the year.”
The Indian IT is also gearing up to meet this demand by strengthening their sales and putting larger number of resources largely in the US market. According to Kotak, the demand environment for IT services has improved in the past few months. “Healthy pick-up in spending in key markets of North America and scope for accelerated market share gains in Europe can support 15% growth for the industry, which in turn can satiate the growth appetite of all players and reduce pricing pressure,” the report said.
Numerous changes within the global IT industry has brought into focus areas such as cloud, mobility, analytics, social to the fore with Indian IT firms adapting rapidly.
Prabhudas Lilladher said, “We expect an agile strategic approach and adoption of new technological trend to drive mid-to-high-teen growth in FY15 and FY16.”