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Last Updated : Jan 07, 2020 12:12 PM IST | Source: Moneycontrol.com

IT firms likely to post 1-2% CC revenue growth; analysts remain bullish on 3 stocks

Key things to watch out for would be increase in deal sizes & tenures in digital; demand commentary, specifically BFSI & retail; and commentary on the improving geopolitical scenario.

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Top five technology companies are expected to report sequential constant currency revenue growth of 0.8-2 percent each in the third quarter of financial year 2020, brokerages say.

The October-December quarter is seasonally weak for the IT companies due to furloughs and holidays in the US.

Appreciation of GBP against the US dollar is likely to be a cross-currency (CC) tailwind which ultimately may support dollar revenue growth that could be around 1-2.3 percent over previous quarter, according to brokerages.

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"We expect moderation in revenue growth due to tepid growth in BFSI, retail & manufacturing verticals with higher furloughs & client-specific challenges for few companies," said Prabhudas Lilladher which sees tier-1 companies reporting sequential growth between 0.9 percent and 2 percent CC, and 0.5 percent and 3 percent CC in tier-2 in Q3FY20.

Sharekhan also expects top five Indian IT companies to deliver 0.8-2.1 percent QoQ CC revenue growth in Q3FY20.

"Unlike Q3FY19, appreciation of GBP against USD would create cross-currency tailwinds of 20-60 BPS on USD revenue growth, resulting in USD revenue growth of 1.1-2.3 percent QoQ, the brokerage said.

Brokerages expect top five IT companies' margin to be supported by rupee depreciation, but among them, Tech Mahindra and HCL Technologies are likely to report degrowth in margin QoQ.

"Though depreciation of rupee against USD and GBP would provide margin tailwind to companies on a QoQ basis, margins of HCL Tech and Tech Mahindra are expected to decline on a QoQ basis," Sharekhand said.

Edelweiss also said, barring Tech Mahindra and HCL, it expects margins of the other three to rise 40–65 bps QoQ as weak rupee (down 1 percent QoQ against the USD) and operational levers kick in.

Sustained momentum in digital and robust deal pipeline across verticals are likely to underpin strong management commentaries after Q3 earnings, the brokerage said.

Key things to watch out for would be increase in deal sizes & tenures in digital; demand commentary, specifically BFSI & retail; and commentary on the improving geopolitical scenario.

From an operational standpoint, many companies have been struggling to tame high attrition over the previous few quarters. This, along with commentary around onsite supply bottlenecks, will be the key areas of investor focus, Motilal Oswal said.

Most brokerages do not expect any material change in the current guidance of Infosys (9-10 percent CC revenue growth YoY for FY20) and HCL Technologies (15-17 percent YoY).

But they expect moderation in revenue growth in medium term due to US elections, lower tech spending by US and Europe in capital markets & banking sectors, waning impact of US tax reforms and margin headwind.

"We expect Brexit outcome to be negative for Indian IT companies, as when UK will leave EU there will be lot of uncertainties due to transition process which could further result in delay in decision making hurting the IT spending environment," Prabhudas Lilladher said.

Despite these headwinds, the demand environment remains healthy, which is evident from the large deal momentum, robust deal pipeline and acceleration in core transformation works by large global enterprises, said Sharekhan which expects operating profitability to remain under pressure owing to elevated attrition, higher onsite expenses, transition costs in large deals, and intense competition.

Nifty IT index gained 0.72 percent during the quarter ended December 2019, underperforming Nifty50 which rallied 6.05 percent in same period.

The underperformance of IT index was due to Infosys whistleblower issue, weak global macro set up, muted spending by US banks, muted performance from european geography, higher impact of furloughs and upcoming election in the US.

Most brokerage houses bet on three stocks - Infosys, Tech Mahindra and HCL Technologies, citing better revenue growth than peers and reasonable valuations.

"We believe companies with the right set of services and capabilities are well placed to capture the opportunities available in the market and are able to deliver growth in CY2020," Sharekhan said.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Jan 7, 2020 12:12 pm
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