IT majors report strong Q3, but earning cuts loom

Moneycontrol Bureau

Infosys, Tata Consultancy Services and HCL Technologies reported strong earnings growth in Oct-Dec, typically a slow quarter given the holiday season. There was even strong outsourcing demand from Europe, despite the debt crisis there. But management commentary indicates this momentum is unlikely to continue going ahead, at least, for a couple of quarters.

"Near-term could be a challenge for the sector. Commentary suggests anxiety among CIOs (chief investment officers) over IT budget spending," Abhishek Shindadkar of ICICIDirect.com told moneycontrol.

Technology bellwether Infosys last week reported a better-than-expected 33.3% year-on-year rise in consolidated net profit in the third quarter, while revenue rose 31%. But it cut its full year US dollar revenue guidance, and forecast a flat growth for the Jan-Mar quarter.

TCS on Tuesday reported a 23% year-on-year rise in Q3 consolidated net profit, while revenue was up 37%, both in-line with expectations. HCL Technologies also reported a better-than-expected net profit growth of 43.3% from a year ago, while revenue was up 35% in Oct-Dec, its second quarter.

TCS said deal pipeline remained strong but it too indicated that some clients were cautious on discretionary spends and environment was challenging for pricing increase.

"As far as pricing is concerned, we will be very careful. The environment is tough, so in this environment it is going to be difficult to get a pricing uptick, but we can definitely say that we will be flattish," N Chandrasekaran, CEO & MD told CNBC-TV18.

"TCS management has remained confident of the demand environment until now (despite cautious outlook by peer Infosys over recent history). However the weak macro environment has finally caught up the management commentary," said Manik Taneja and Priya Gajwani of Emkay Global Financial Services.

Discretionary spends contribute 20% of TCS' total revenues and the company's internal survey suggests a slower ramp-up in 50% of these projects. Delays ranged from 1-6 months, point out Yogesh Aggarwal and Karthik Subramaniam of HSBC Global Research.

"Overall, we believe the results of Infosys and TCS clearly suggests the demand environment has deteriorated in the past three months. While it is too early to expect any improvement in budgets/spending through the year, at this stage, due to lack of visibility and the macro uncertainties in Europe, top-line estimates are likely to come down to the lower end of the range of 12-15%, from 15% earlier," Aggarwal and Subramaniam said.

HSBC cut its fiscal 2013 revenue growth forecast for TCS to 12% from 15%. Several brokerages had cut their revenue forecast on Infosys last week.

ICICI Direct's Shindadkar too expects lot of analysts on the street will cut their estimates on IT companies citing soft fourth quarter and first quarter next fiscal.

Investors hammered TCS shares on Wednesday. It fell over 4% before recovering some what. But It was still down 1.3% at Rs 1,089.95 on NSE in noon trade.

"What was lacking (in Q3 results) was a positive surprise - something that the street has got used to from TCS. With cautious management commentary for the near term and expectations running high, we do not see the scope for positive surprises," said Vishal Agarwal of Jefferies. It has a "hold" rating on the stock.

ICICIDirect.com has a "buy" on Infosys and "hold" on HCL Technologies.

Infosys shares were down 1.9% at Rs 2,610 on Wednesday. The stock is down near 6% since the results were announced last week. HCL Tech was down 0.7% at Rs 422.55.

Nachiket Kelkar
nachiket.kelkar@network18online.com