IT sector Q3 preview: Analysts see subdued quarter on seasonal weakness; rupee may aid margins

For the December quarter, the Nifty IT index was up over 11 percent.

Moneycontrol takes a look at what multiple brokerages are talking about the result expectations.

HDFC Securities

The brokerage house expects the quarter to be impacted by seasonality. But it expects mild revenue acceleration.

“Revenue growth is expected at 1.2 percent QoQ and 9.1 percent YoY. Tier-1 IT is expected to post revenue growth of 1.2 percent QoQ (as compared to 0.3 percent in 3QFY16-17 each),” the brokerage house said in its report.

Meanwhile, it expects Tier-2 IT to grow at 1.8 percent QoQ and 11.2 percent YoY for the quarter.

“Within midcaps, Persistent and Majesco are expected to post highest sequential revenue growth. Cross-currency impact will be negligible following prior two quarters of strong tailwind,” the report added.

KR Choksey

The brokerage expects the sector’s Q3 show to have muted growth due to seasonal weakness.

“We don’t see any significant tailwind in cross-currency to support the topline growth and margins for tier-1 companies. The reduction in IT spending is expected to continue for 3Q FY18 as well, primarily due to the challenges faced by BFSI and Retail sectors in the North American region, whereas Manufacturing and Healthcare sectors are expect to see some improvement due to strong adoption of digital services,” the brokerage house said in its report.

Companies such as TCS, Infosys, and Wipro are likely to report a sluggish top-line growth within a range of 0.7 percent-2.5 percent, whereas HCL Tech and TechM are expected to report a revenue growth of 2.5 percent and 2.7 percent respectively.

It is also placing a bet on IT sector to reap benefits from the major reform that will be brought to the US Tax Bill, which is expected to cut the corporate taxes from 35 percent to 20 percent that would provide more room for businesses to increase their budget for IT spending.

Edelweiss

The brokerage expects top-5 IT players—Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies (HCLT) and Tech Mahindra (TECHM)—to clock 0.7 percent-2.7 percent QoQ USD revenue growth.

“Major global currencies were fairly stable during Q3FY18 and accordingly we do not expect currencies to materially affect revenue growth or margins,” it said in its report.

It expects HCL Technologies and Tech Mahindra to lead the pack with 2.7 percent and 1.7 percent QoQ USD revenue growth, respectively, Infosys, Wipro and TCS are estimated to grow at a slower pace of 1.4 percent, 1.4 percent and 0.7 percent, respectively.

What is it monitoring?

1) Infosys’ strategic roadmap post appointment of new CEO, Salil Parekh

2) Demand commentary in BFSI & Retail

3) Clients’ budget & pricing and deal pipeline in legacy businesses;

4) Traction in digital services;

5) Pace of local hiring in US.

CLSA

CLSA said CY17 saw a better-than-feared year for IT sector even as growth & earnings disappointed.

"We don’t see strong bottom-up signs of growth recovery. Companies will have to negotiate challenges from immigration & tax change distractions," it added.

The research house expects demand to continue to remain soft in Q3 results for IT companies. December 2017 will be a seasonally weak quarter with constant currency QoQ growth of 1-2.6 percent, it said.

CLSA has reduced its growth expectations for Wipro, TCS & HCL Technologies, and lifted expectations for Infosys.

ICICI Securities

The brokerage house said that Tier-1 IT companies are likely to report constant currency (CC) growth of 1-2 percent as weak seasonality kicks in the quarter accompanied by the transformation that the IT industry is going through.

Meanwhile, it expects rupee tailwind may partly provide margin comfort. “With depreciation of rupee impacting margins positively by 20-25 bps, we expect margins of Tier-1 IT companies to remain range bound,” the report added.

Going forward, owing to transition of IT landscape from traditional to digital, it also foresees companies witnessing higher growth in FY19E compared to FY18E expectations.