Infy to cut guidance, Q1 flattish for IT

The stage is set for some unusual action from the information technology (IT) space.

The June quarter results are likely to be the weakest in terms of dollar revenues since the financial crisis days on the back of low discretionary spending by clients and weak demand environment, analysts said.
Infosys, India’s second-largest IT firm, which is expected to kick off results season next week, is seen lowering its guidance for the current fiscal anew, after weighing adverse impact of cross-currency headwinds and a continued slowdown in deals.

Anantha Narayan and Sagar Rastogi, analysts with Credit Suisse, said in a note there was a strong chance that Infosys could cut its dollar revenue guidance down to 6-8% or 7-9% from 8-10% guided last quarter, due to “no positive surprises in deal flows in the June quarter, coupled with a 100-150 bps adverse cross-currency movement.”

Ankita Somani, analyst with Angel Broking, said cross-currency has played spoilsport. “The company is not expected to grow more than 3% in the third and fourth quarters as well, which are in any case slower traditionally.”

Kawaljeet Saluja, Rohit Chordia and Shyam M, analysts with Kotak Institutional Equities, echo similar sentiment. “We expect a material 250 bps cut in Infy’s revenue growth guidance to 5.5-7.5% from 8-10% earlier.

Guidance cut would be around 1.5% points on constant currency with adverse cross-
currency movements contributing the
balance 100 basis points (bps),” the trio wrote in a note.

Infosys has delayed bringing on board 28,000 engineers hired from campuses to as late as July 2013, and may not provide the expected wage hikes this quarter as well, looking at the feeble IT industry growth.

Even TCS, which is the only top-tier IT firm to have seen a huge jump in profits in three straight quarters, despite the uncertain economic environment has not been spared by analysts.

“The positives of rupee depreciation will not aid TCS this time, due to its high visa costs and wage hikes. At the most, the rupee volatility will only help offset a fall in revenues due to these two factors, and the company is expected to report flat growth,” said Somani.

Last year, TCS had sought 4,500 H1 visas, and offered wage hikes of 8%.

But a strong deal environment and a balanced mix of vendor partnerships makes industry analysts confident that TCS will continue to lead the pack with a 2.4% on-quarter revenue growth.

It is expected to be followed by HCL Technologies.
“We expect a stronger June quarter than peers with more deals than its peers. It also has the greatest earnings sensitivity to the rupee at 2.5% EPS upside for every 1% movement in the rupee, despite the fact that rupee gains will be reinvested back into the business,” said Mitali Ghosh and Kunal Tayal, Bank of America analysts, in another note.

The banking, financial services and insurance (BFSI) vertical, which is expected to continue to grow slower than the industry average for the year, could prop up matters.

Wipro, which has seen a very bad last fiscal, is expected to grow faster from the second quarter onwards, thanks to its lower exposure to BFSI and strong growth from its other verticals, and a 40-50 bps gain thanks to rupee depreciation.

“Retail, insurance, core manufacturing and healthcare industries are doing well. In Europe, specifically, the company is seeing traction in the French and German markets,” Narayan and Rastogi said.

However, for the first quarter, the No. 4 is still expected to report a decline in the topline.
The effects of rupee depreciation is however expected to aid mid-tier players, which are less prone to hedging, and have given lesser wage hikes.

So analysts see them reporting 0-3% topline growth with Hexaware leading with 4% growth, despite wage hikes.