As the euphoria over the recent corporate tax cut appears to have subsided, the market is awaiting its next major trigger, the corporate earnings.
The result season for September quarter is here; IT majors Tata Consultancy Services (TCS) and Infosys will announce their earnings on October 10 and 11, respectively.
Brokerages feel the IT sector's performance will be modest, however, TCS, HCL Technologies and Infosys are expected to report steady growth.
"We expect revenue growth in constant currency (CC) terms between 1.3-6.5 percent quarter-on-quarter (QoQ) for Tier-1 IT companies. Q2FY20 to be a steady quarter for Indian IT services with Infosys, HCL Technologies and TCS are likely to post steady revenue growth in tier-1 and Hexaware, NIIT Tech, Persistent to post steady revenue growth in tier-2 IT services,"
said brokerage firm Prabhudas Lilladher.
"Q2 is a seasonally strong quarter but year-on-year (YoY) revenue momentum will be muted for most of the IT companies and deal closure will be muted due to uncertain global environment," the brokerage added.
The brokerage expects margins to improve sequentially across its coverage companies led by the absence of visa cost, wage hike and rupee depreciation.
However, it said it continues to remain watchful on the overall demand environment as the US is entering elections with continued uncertainty around trade war which may create headwinds for tech spends of US BFSI.
Brokerage Kotak Securities thinks IT firms may report modest growth numbers in Q2, barring Infosys, TCS, Hexaware and Mphasis, who are likely to report steady growth numbers.
"We expect steady growth for Infosys and TCS among Tier 1 IT and Hexaware and Mphasis among mid-caps. We build in modest growth expectations for other companies," said the brokerage in a recent report.
"Except Wipro, EBIT margin will likely decline for all companies on YoY basis due to factors, including an increase in US cost structure, investments to grow digital business and transition costs in large deals," the brokerage added.
However, Kotak is optimistic about the demand environment, which, as per its assessments, continues to be healthy although a slowdown in BFS spending and client-specific challenges are soft spots.
"Demand environment for IT services remains healthy with strong deal flow momentum for many companies," it said.
The brokerage expects a 3.5 percent QoQ revenue growth for Infosys with 60 bps contribution from Starter acquisition.
Also, strong revenue growth in Infosys, as per the brokerage, will be aided by the ramp-up of large deals and broad-based strength across verticals.
For TCS, the brokerage expects a 2.6 percent QoQ revenue growth with challenges in financial services and retail verticals, while Wipro may disappoint with a 1.2 percent QoQ revenue growth despite a seasonally strong quarter.
Revenue growth for HCL Technologies will be powered by the completion of the acquisition of select IBM products, Kotak Securities said. Underlying organic growth will likely be weak at 0.7 percent QoQ due to productivity commitments in large IMS projects and a relatively high base of the previous quarter.
Tech Mahindra is likely to see modest growth of 1.7 percent while a weak growth is expected in the company's enterprise segment, as per the estimates of Kotak Securities.
(Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.)
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