Weak demand to offset rupee decline gains for IT cos in Q3

117055 Investors following Infosys. Share this News with them.

0

Like this story, share it with millions of investors on M3

Weak demand to offset rupee decline gains for IT cos in Q3

Tech bellwether Infosys will kickstart earnings of software services providers next week and its going to be a tight rope walk between a depreciating rupee and tough business environment in US and Europe.

Post your opinion here

 

0

Tweet

Share on Tumblr

ALSO READ News and Notices about Infosys See interviews with Infosys Management See what other Experts & Brokerages are saying about Infosys See previous Results of Infosys Infosys BSE | NSE 31/05/12 Are Mutual Funds betting on Infosys? Other Stocks in this news Tata Consultancy Services | Wipro | HCL Technologies |

Moneycontrol Bureau

Tech bellwether Infosys will kickstart earnings of software services providers next week and its going to be a tight rope walk between a depreciating rupee and tough business environment in US and Europe.

Rupee depreciation should ideally spell good news for IT companies. However, the cheers will be short-lived this time around, and the uncertainties in the macro environment led by the Eurozone debt crisis will weigh high on the third quarter earnings and future guidance.

"The business outlook has deteriorated over the past few months. Our interactions with most companies suggest moderation in commentary - there have been a lot of discussions on longer sales cycles and decision making delays," said Surendra Goyal and Rishi Iyer of Citigroup Global Markets.

"Pricing commentary has been stable - but we would not be surprised with some pricing decline going forward as companies aggressively position for business in a tough environment," the analysts added.

Citigroup only expects 1-3% sequential revenue growth for tier-I companies like Infosys , Tata Consultancy Services and Wipro . IDFC, Religare expect top IT services companies will report 2-4% quarter-on-quarter US dollar revenue growth in the third quarter. Smaller players could see a 2-6% revenue growth, said IDFC analysts Hitesh Shah and Abhishek Gupta.

Margins though will get some boost due to the recent depreciation in rupee. The rupee, the worst-performing Asian currency, has declined 15% against the dollar in the last few months, which will help margins expand up to 300 basis points.

Religare Institutional Research analysts Rumit Dugar and Manoj Singla expect Infosys and TCS will see their EBIT margins expand 210 bps and 140 bps respectively in the third quarter. JM Financial expects EBIT margins will expand 200-300 bps for most companies due to the rupee depreciation.

However, foreign exchange losses due to hedges will limit net profit gains for some companies. Infosys is the least hedged and the Religare analysts expect its earnings per share to grow 20% over the three-month period. TCS, Wipro and HCL Tech 's EPS is expected to grow at 11%, 4% and 7% respectively, they said.

Eye on Outlook

The Oct-Dec quarter is seasonally a weak quarter for IT companies as Diwali and Christmas holidays means lower billing days. It is the guidance for the next financial year that will be more keenly eyed. And analysts are not expecting any positive surprises there.

"We expect the companies to maintain a cautiously optimistic stance on calendar 2012 IT spend and fiscal 2013 revenue growth," said Shah and Gupta of IDFC.

"We expect a moderation in the demand commentary and select instances of project delays/cancellations from companies. Amongst verticals, we expect manufacturing and retail outlook to be relatively better while financial services and technology/ telecom outlook may be muted," said Govind Agarwal and Arshad Perwez of JM Financial Institutional Securities.

"While the currency is a huge tailwind, it is difficult to take a view on sustainability of the same," said Citi analysts Goyal and Iyer.

Further more, given the already stiff competition, and companies chasing limited demand opportunities, there could be a pricing war, with some companies likely offering price cuts to pass on the benefits of rupee depreciation, warn analysts.

Stock view

IT stocks have outperformed the broader volatile markets in the last few months. The CNX IT index is up 11% since September 30, while the Nifty has slipped 4% over the same period.

IDFC is "cautious," Citi is "neutral" and Religare has a "positive" view on the tech sector. All the three have Infosys among their top pick. Citi also "advises" a buy on HCL Tech and Wipro.

Nachiket Kelkar
nachiket.kelkar@network18online.com