Q3 preview: Weak client spend to hit IT, TCS seen gaining
Infosys will kick start IT industry earnings for Oct-Dec this week, a seasonally weak quarter for the sector. This time the weakness will be more evident due to the overall slowdown in client spends and the impact of Hurricane Sandy that hit in November.
January 07, 2013 / 17:50 IST
Moneycontrol Bureau
Infosys will kick start IT industry earnings for Oct-Dec this week, a seasonally weak quarter for the sector. This time the weakness will be more evident due to the overall slowdown in client spends and the impact of Hurricane Sandy that hit in November. "There is some recovery in the US, but concerns on Europe and BFSI persist. Clients are cautious on new/large deal signings and discretionary IT spend," said Priya Rohira, ED - IT and Telecom, Axis Capital.The India's second largest software services provider, hurt by delayed decision making by clients amid the overall economic uncertainties is likely to fall further behind its rival Tata Consultancy Services. The Bangalore-based company, which is already expecting growth much slower than the industry, recently warned of continued slowdown in decision making by clients. Therefore many analysts expect it will cut its organic guidance further.Barclays Bank, for instance, expects Infosys to report sequential organic revenue growth of 1.5 percent. The total revenue growth in US dollar terms should be 3.7 percent quarter-on-quarter, boosted by the consolidation of Lodestone acquisition from Nov 2012."A combination of client furloughs, Hurricane Sandy and delays in projects in the BFSI (banking, financial services, insurance) vertical led to the slowdown in the Dec-12 quarter...Even a 4 percent quarter-on-quarter growth rate (per our forecasts) for the Mar-13 quarter should result in Infosys' FY13 organic revenue growth rate being only 3.8 percent year-on-year, on our estimates, well below its guidance of 5 percent," said Barclays analysts Bhuvnesh Singh and Vaibhav Dhasmana. That apart, the wage hike it implemented last quarter, will also hurt margins.Else where, TCS and Wipro are expected to lead the sector with around 3-3.5 percent sequential growth, analysts say.Margins of some companies, mainly Infosys and HCL Tech are likely to get impacted due to the wage hikes, apart from fresher intake and onsite investment.Credit Suisse, for instance, expects HCL Tech's EBIT (earnings before interest, taxes) margin to fall 150 basis points. Other companies like TCS, Wipro, Tech Mahindra, MindTree and NIIT Technologies could see their margin contract 30-80 basis quarter-on-quarter, due to Rupee appreciation.ROAD AHEADRohira of Axis Capital feels 2013 will be the second consecutive year of divergent growth rates, with Infosys taking a cautious stance and TCS showing optimism."TCS recently indicated seeing the first signs of a pickup in discretionary spending, a positive on overall spending trends," said Singh and Dhasmana of Barclays.Infosys too is seeing a better year for the IT industry in 2013, but the uncertainties have not gone away, a report said quoting Kris Gopalakrishnan, executive co-chairman.Researcher Gartner last week upped its forecast and said global spending on information technology will grow 4.2 percent (earlier expected 3.8 percent) to USD 3.7 trillion."The uncertainties surrounding an upturn in global economic growth have been major retardants in the growth of the IT sector...However, much of this uncertainty is nearing resolution; and as it does, we look for accelerated spending growth in 2013 compared to 2012,” managing vice-president Richard Gordon said in a statement. According to Rohira, USD 120 billion worth of deals are coming up for renewal this year, versus USD 102 billion in 2012. However, outlook on discretionary IT spends will be key."Our interactions with company managements suggest flat-to-declining budgets for 2013, but clarity would emerge post management commentary," she said.STOCK TALKThe overall slowdown in the IT sector has reflected on the stocks too. The CNX IT Index is down 6 percent so far this financial year, even as the wider Nifty has gained near 14 percent in the same period.Since Sep 30, among some of the IT stocks, HCL Tech and Wipro are up 10 percent and 6 percent respectively and TCS has gained 0.3 percent. However, Infosys and Tech Mahindra are down 7 percent and 3 percent respectively.Barclays is "overweight" on MindTree and HCL Tech, "underweight" on MphasiS and Wipro and "equal weight" on TCS and Infosys.Credit Suisse, on the other hand, has an "outperform" rating on HCL Tech, Hexaware, NIIT Tech, TCS and Wipro. It is "neutral" on Infosys, Mahindra Satyam, MindTree and Tech Mahindra.Axis Capital advises a "buy" on HCL Tech and Tech Mahindra, but says TCS valuation "leaves little room for upside." It has a "hold" on Infosys and "sell" on Wipro, saying the two companies are "yet to deliver desired growth."Nachiket Kelkar
nachiket.kelkar@network18online.com Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
