Q2FY13: IT firms to post muted results, says Emkay Global

The second quarter earnings season will kick off with IT major Infosys announcing its results on October 12. Dhananjay Sinha of Emkay Global told CNBC-TV18 that sales growth of IT companies will be muted for Q2. 

Revenue growth, pricing power conditions and margins will be the three key aspects to watch out for in their earnings, he added. Tier one IT companies are expected to post around 2.2-4 percent quarter on quarter growth dollar revenue. "Wipro will be at the lower end and TCS will be at the upper end. For Infosys we are expecting about 3 percent," he elaborated. Meanwhile, tier two companies may see deceleration in top line. Growth is likely to be in the region of 2-4.5 percent, he added. Below is the edited transcript of Sinha's interview with CNBC-TV18. Q: IT, how are you looking at the earnings and in that which are the companies that will take your attention? A: The key thing we are looking at in the IT space is what is going to be the revenue growth, what will be the pricing power conditions and what will be the margins. By and large, we are expecting kind of muted growth in terms of sales growth. In terms of dollar revenue, we are expecting that the large cap or tier one IT companies will be showing something around 2.2-4 percent quarter on quarter growth in revenues. This will be a fairly muted growth. Within this, Wipro will be at the lower end and TCS will be at the upper end. For Infosys we are expecting about 3 percent. For tier two companies as well, we think that this quarter there should be a deceleration as far as expectation on top line is concerned. A bulk of the growth is likely to be in the region of 2-4.5 percent. Q: What would you go long with in the midcap space? A: With respect to Infosys and TCS, we think that there will be certain improvement in margins because of certain operating efficiencies and that would reflect in improvement in utilization rate. But with respect to the midcap space, we are positive on Tech Mahindra, MindTree and Hexaware. Q: In general what's the call for the earning season because we have seen a good rally, do you see this earning season on a consolidated basis, provide that trigger for the market for the rally to continue or is it likely to stall the rally, there might be a bit of an earnings downgrade as well on a consolidated basis? A: The outlook that we have been maintaining is that we will see deceleration in the top line growth. We see that across multiple sectors both in consumption and investment space. So we are seeing on an aggregate basis excluding banking and oil, the total top line growth will be in the region of 13-14 percent. It will be a mark deceleration from something like 20 percent in the previous quarter and it will overweigh the entire earning outlook. There might be a slight improvement in margins on an incremental basis. Excluding IT however, there will continue to be a contraction in margin. The earnings might actually continue to be under pressure in the region of about 10-11 percent excluding IT it will be much lower. The pressure on the earnings will continue. Going forward, I am looking at the markets; it is basically reacting to some of the global developments with respect to Fed rate, ECB etc which I have provided a significant positive trigger. Tere have been certain measures that have been announced with respect to reforms, my sense is that the substance in the aggregate reform measures that have been announced are yet to be assessed in an aggregate basis. It is not likely to be substantial. Going forward, we would continue to expect at least for the next two quarters that the entire setup that we have with respect to the top line growth and then the implication for profits will continue to be there. Q: Would you go long on any of the infrastructure construction stocks, those have been high beta, anything you will avoid before the earning season? A: No as far as the cap goods and infrastructure space is concerned, we are positive on Ashoka Buildcon and IRB in the midcap space. From a large cap space, we have been positive on L&T which has done well. We are positively inclined towards BHEL as well and Greaves Cotton. These are the names that we would look for. We would still not get into midcap or small cap goods space because the issues with respect to top line growth will continue to be there. Interest cost is likely to be concerned even there. One can play with respect to the market, but from a fundamental stand point I would still not like to play that.