Top IT firms to barely meet Q4 guidance

Information technology (IT) companies are likely to report muted revenue numbers for the January-March quarter (Q4), in line with market expectations, but margins could slip as a result of a small appreciation in rupee, minor pricing erosion and continued hiring. They are seen barely meeting guidance.

Credit Suisse analysts Anantha Narayan and Sagar Rastogi, in their note to investors on Monday, said the sequential volume of the sector may grow at a listless 0-3.4% with stable to negative pricing following a strong quarter.  “We expect most of our coverage universe to report 0-3% quarter-on-quarter (q-o-q) revenue growth, in keeping with expectations. Margins should be weaker sequentially for most companies on account of continued hiring, relatively muted growth and a slight appreciation of the Indian rupee against the dollar, euro and GBP,” they wrote.

Analysts Yogesh Aggarwal and Vivek Gedda of HSBC also see margins coming under strain due to currency headwinds from a stronger rupee. According to their estimate, the earnings before interest, taxes, depreciation and amortisation (Ebitda) margins of top-tier IT services exporters could sequentially shrink  up to 200 basis points (bps) as utilisation takes a hit from muted revenue growth and a firmer rupee, which moved 4% in March quarter.

However, Aggarwal and Gedda estimated a 20-50 bps gain for IT services on account of positive cross-currency movements in the quarter.

The HSBC duo believes guidance of Infosys and Wipro for the current fiscal and June quarter would play up as crucial cues. “Strong FY13 guidance, but muted first quarter FY13 guidance, which means an expectation/guidance of back-ended growth, could be dismissed by investors in our view,” they said. But many feel Infosys had lost its status as an industry bellwether after sending out a wrong signal in the recent past.

“As usual, Infosys’ guidance will be a focal event, but we do not believe that this can be a proxy for industry growth anymore. It is also a moot point whether Infosys’ guidance is an indication of industry growth anymore — in calendar year (CY11), Infosys’ revenue rose 19% against 28% and 33% for TCS and Cognizant, respectively,” wrote Narayan and Rastogi in their report.

Most analysts peg Infosys’ dollar revenue growth guidance for the current fiscal at a range of 13-15%, which was in tune with the IT industry body Nasscom’s predictions. Also, not many believe that the second-largest tech firm would discontinue the policy of offering guidance.

The Credit Suisse analysts, in their assessment, said Tata Consultancy Services (TCS) and HCLT may outperform peers and Hexaware and Mindtree, among the smaller ones. Ankita Somani, analyst with Angel Broking, feels that contrary to the traditional trend, weakness of the third quarter is likely to spill into the fourth quarter. “The fourth quarter is going to be weaker than normal because of decision delays. Clients are not taking any long-term decision. Hence, things have not been smooth for the industry as a whole,” she added.

According to her estimate, the tier-I companies will not have a very smooth ride as IT bellwether Infosys is expected to report a flat dollar revenue growth and a 2% decline in rupee revenue growth.
Wipro is expected to continue scripting its comeback story this quarter as well though the pace will be slow this time around. She expected the TK Kurien-led company to register a 2.2% dollar revenue growth and a 1.5% rupee revenue increase.

“Wipro, Infosys and HCL will all be in the lower range of what they have guided for,” said an analyst asking for anonymity. However, the quarter may be especially bad for TCS.

“Though it has been performing well, the management does not seem to be too confident this time around. It will not be a surprise if TCS performs below market expectations,” said an analyst. The dollar revenue growth for the company is expected to be less than 3%.