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Deal wins to drive IT Q4 results

Infosys, TCS and HCL Tech are expected to post strong revenue growth despite strong rupee

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As India Inc. gears up for the corporate earnings, the information technology (IT) sector is poised for healthy fourth-quarter earnings on the execution of deal wins in the recent past, according to analysts.

This week, two IT biggies Infosys and Tata Consultancy Services (TCS) will announce their March quarter earnings on April 12, followed by Wipro on April 16.

According to stock-broking firm Nirmal Bang, Nifty IT index outperformed Nifty by a modest 160 basis points (bps) in the March 2019 quarter. Domestically, the sentiment was bolstered by the view that the current NDA government will come back to power in the general elections.

"The cumulative outperformance of Nifty IT by approx. 2,400 bps over Nifty in the past 15 months has priced in the modest acceleration in revenue growth of select companies in both FY19 and FY20. Stock price performance has also been bolstered by the strong capital return to shareholders. On an industry aggregate basis, we believe growth would accelerate a tad vis-à-vis FY19. Much of this expectation is largely built into the significant outperformance that Nifty IT index has shown in the past 15 months," Nirmal Bang said in a research report.

According to the report, there could be some modest disappointment in store on both revenue and margin fronts, especially in 2HFY20, because of slower economic growth in the US, Europe and China. Other issues like concerns over demand from global BFSI sector because of a flattening yield curve; potential softening of demand from manufacturing sector due to tariff imposed by the US on Chinese goods and potential softening in pricing, both in digital and legacy services, consequent to pressure from customer spends.

The report also said that unlike in the past when fourth quarter tends to be relatively weak, as customers get into their budgeting cycle, it expects almost all companies to show a reasonably healthy growth on quarter-on-quarter (QoQ) basis driven by execution of deal wins in the recent past. Among Tier-1 companies, it expects 1.5-2% QoQ revenue growth in case of TCS, Infosys and Wipro in constant currency (CC) terms, while HCL Technologies and Tech Mahindra would clock 3-4% growth. Mindtree and Persistent Systems are likely to show growth of 2.6-2.7% QoQ.

"While TCS was a standout performer among the large companies in terms of organic revenue growth in FY19, we see slightly slower growth for it in FY20. For most other large companies, we see a modest acceleration in organic growth in FY20. This view is driven by the stronger order inflow over the course of FY19," the report added.

In another research report by Kotak Institutional Equities, it said March is a seasonally weak quarter for IT companies, yet it expects a steady quarter with strong growth from Infosys, TCS and HCL Technologies. However, muted performance from Wipro and Tech Mahindra is expected as growth will be led by the ramp-up of large deals won by companies over the past two quarters.

On profitability, the Kotak report said that earnings before interest and taxes (Ebit) margin will decline marginally on a sequential basis due to 1.9% appreciation of the rupee against dollar and talent constraint-led increase in cost structure in the US.

"Profitability performance will be a key focus area. Benefit from the strong deal flow and increasing digital deal sizes will be offset to some extent with slower spending growth in budgets in FY2020. We expect slower growth from the banking vertical for the industry in FY2020E. We expect Infosys, HCL and Tech Mahindra to grow faster in FY2020E. Stock returns for IT companies can be muted from here after a strong performance in the past 12 months," it further added.

Reliance Securities in its report said that the dollar revenue growth of TCS, Infosys, Wipro, HCL and Tech Mahindra are seen between 2% and 3% while ebit margin may remain flat or lower on unfavourable currency movement and business investments.

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