Moneycontrol Bureau
As they draw up spending budgets for the next year, an expected pressure on key clients of the Indian IT-services industry in 2015 is expected to weigh on their earnings visibility for fiscal year 2015-16.
That’s the takeaway from a Motilal Oswal report penned by analysts who met managements of some of India’s top IT companies recently.
In the report, analysts wrote that key western clients such as in the banking, financial services and insurance (BFSI), retail and energy sectors, which cumulatively account for revenues of between 47 percent and 58 percent for IT majors such as TCS, Infosys, Wipro and HCL Tech, may face spending pressures going forward due to industry-specific headwinds.
“Banking has been subjected to heavy fines -- from Libor rigging and sanction busting to forex manipulation -- which have continued in calendar year 2014. The total fines paid by banks in the first eight months of this year stands at USD 50 billion,” Motilal analysts wrote, adding that insurance too as a sector was yet to pick up.
“In retail, multiple challenges like heavily discounted holiday sales last year, leadership changes, some following the credit card frauds, dented the spending by the industry in 2014. Change in the tide was expected in the second half, but remained elusive. In addition to that, holiday season sales this year thus far have not been eye-catching, keeping expectations muted,” they wrote of the retail sector, which accounts for 9.5-15.3 percent of revenues for the Big 4 firms.
While energy companies, to which a firm such as Wipro has 16.8 percent exposure (the other three have 4.3-9.3 percent) is staring at sharply weak profits going forward thanks to a recent collapse in oil prices.
The clouded outlook has reflected in statements of IT companies such as US-based Cognizant and TCS, both of which recently revised their FY15 guidance lower.
That said, this does not imply investors should rush for the exits if they hold these stocks. Beyond these headwinds, Indian IT companies are also expected to benefit from the sharp fall in the rupee versus the US dollar.
According to Motilal Oswal’s estimates, it may pencil in an 8-13 percent upgrade to its FY16 EPS estimates for these companies, based on the fact that the rupee is currently 5 percent lower than the Rs 60/USD it had modeled earlier.
As well, as opposed to earlier when the opportunity for low-cost IT services simply exploded, and about every company benefited from it broadly, revenue growth has now become disparate for different companies as business models evolved and became more matured.
“From a bottom-up perspective, there will still be instances of individual companies leading growth over the others,” analysts wrote in the report, pointing to, for instance, TCS’ foray into continental Europe, “where first-time outsourcers are driving growth, which will keep it in good stead”. Or growth in engineering services, in which HCL Tech has obtained a lead.
But even as definite clarity on 2015 spending budgets is about a month away, according to Motilal Oswal analysts, the recent correction still makes many companies a buy opportunity for them.
Among top Indian IT firms, they are bullish on Infosys (thanks to the steep valuation discount of 17 percent to TCS), HCL Tech (focus on engineering and infra management services clients) and Tech Mahindra (expected to grow the fastest).
They are neutral on TCS and Wipro but added they turn positive if a further correction takes place.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!