Slow ramp ups, macro worries to weigh on IT cos Q1 earnings
It is likely to be a subdued start to the June quarter earnings season as a weak demand environment could keep growth rates of IT companies in check.
July 06, 2012 / 15:18 IST
Moneycontrol Bureau
It is likely to be a subdued start to the June quarter earnings season as a weak demand environment could keep growth rates of IT companies in check.The British Pound, Euro and Australian Dollar depreciated against the US dollar, which should impact dollar revenue growth by 1-2% sequentially, but the sharp rupee depreciation is likely to benefit."We expect the uncertain environment plus adverse cross currency movement to restrict volume growth in a traditionally strong quarter. We estimate a muted 1.1%/1.2% quarter-on-quarter volume growth for Infosys/Wipro; reported US dollar revenue growth could also see cross currency headwinds," according to Pankaj Kapoor and Apoorva Oza of Standard Chartered Bank.The top four companies in the sector are likely to report 0.5-4% sequential volume growth in April-June, according to HSBC Securities and Capital Markets.There will be margin expansion in the first quarter due to the weak rupee, which could lead to earnings upgrades by 4-20%. However, stock upside would be largely driven by volume growth outlook and that remains subdued, Yogesh Aggarwal of HSBC said.Companies like Infosys had warned earlier that the year ahead looked challenging for the IT services industry with a slow recovery in global markets. Analysts now expect any growth if at all will be "back ended.""We expect a muted June quarter due to slow ramp ups further impacted by cross currency impact of 0.5-1%. We forecast 0-3% quarter-on-quarter growth in USD revenue for Indian large cap IT players," said Sandip Agarwal and Omkar Hadkar of Edelweiss Securities.While uncertainties persist in Europe, the Edelweiss analysts believe cost cutting pressures in European geography will drive growth for IT companies from the second half of this year.Helped by the rupee depreciation, first quarter margins are likely to expand as much as 225 bps, which will largely absorb the impact of wage hikes and US H1B visa costs, according to Agarwal and Hadkar of Edelweiss.Will Infosys cut Dollar guidance?India's second largest IT firm and once bellwether Infosys had shocked the street by guiding for a 8-10% USD revenue growth for FY13, significantly lower than the 11-14% growth projected by industry body NASSCOM. Analysts now expect the Bangalore-based company will further cut its guidance to 7-9% to adjust for the cross currency impact. "At the current currency rates (Pound/USD, Euro/USD, Australian Dollar/USD) the US dollar top-line growth is likely to be impacted by near 1.5% for the full-year. In that regard, FY13 guidance may have to be adjusted downwards," said HSBC's Aggarwal.Key Things to Watch- Infosys guidance and commentary on the year ahead by other companies
- Volume growth in sectors like manufacturing, telecom and retail among others, especially given weak BFSI sector
- Pricing trends
- Net employee hirings in the first quarter and changes if any to full year targets
- Client additions and deal pipelineSTOCK TALKIT stocks have underperformed the broader markets since April. As of Tuesday's close the CNX IT index is down around 7%, while the broader NIfty has been flat.Kapoor and Oza say typical valuations will roll forward to financial year 2014 earnings per share expectations over the next three months. Present valuations lend support to Infosys and Wipro, currently at 22% and 19% discount to five-year median PE, the analysts say.HSBC's Aggarwal feels volume growth guidance for the second quarter and pricing trends might be the most influential share price drivers.Among the top companies, HSBC is "overweight" on TCS and HCL Tech. HCL Tech is also a top pick for Standard Chartered and it also has a "outperform" rating on Infosys and Wipro. Edelweiss has a "buy" on Infosys and Hexaware and "hold" on most others. Nachiket Kelkar
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