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IT services firms likely to show strong Q3 growth on deal momentum

Business Standard:  January 08, 2019

Mumbai: Investors would be looking forward to the final guidance for FY19, as IT major Tata Consultancy Services (TCS) kick-starts the December quarter earnings season for the IT industry this Thursday, and Infosys follows suit on Friday. They would also be keenly watching the macroeconomic outlook, especially on the US economy, Brexit, and the deteriorating US-China relationship and its impact.

Given the large contracts won over the past two quarters, the commentary will be expected on the deals momentum. Analysts are keen to note how fast Infosys is catching up with TCS, even as the Mumbai-based company is expected to give some outlook on BFSI and Retail.

Macro factors such as concerns around the US economy and Brexit are likely to lend a direction to client budgets and consequently a pull-back on spending might indicate how the IT players are poised in Q3. “Growth is expected to continue accelerating into Q3FY19 (estimated 8.9 per cent YoY CC), contributed by good progress at each of the top 5 clients. We expect 11.7 per cent YoY growth at TCS -– the highest among tier-Is, while TechM should lag with 4.7 per cent YoY CC growth, given sluggish momentum in Communications (segment),” noted Motilal Oswal research Analyst Ashish Chopra in a report.

The equity analyst firm also expects Infosys to improve its performance in the December quarter with a CC revenue growth of 9 per cent (YoY), up from 8.1 per cent in Q2FY19. Besides, the Bengaluru-headquartered company’s commentary on attrition and guidance will be watched closely as the firm continues to show strong performance despite a slew of top-level setbacks over the past year.

With TCS already sounding very confident about its growth over the past two quarters, experts and analysts will be watching its commentary on banking financial services and insurance (BFSI) as well as retail. They will also be watching out the company’s commentary in deal momentum, especially given the strong wins reported during the past two quarters.

Among others, while most of the Indian IT players are expected to accelerate their presence in the digital space, depreciating of major currencies against the US dollar is expected to hurt the sector to some effect. “Depreciation of major global currencies against the dollar is likely to hurt revenue growth again by 40–70bps sequentially. At the same time, the rupee depreciation against the Dollar would lift margins 40–60bps QoQ,” said Sandip Agarwal, analyst, Edelweiss in a note.

During Q3FY19, the rupee on average depreciated 2.7 per cent against the dollar, which is expected to lift the margins by 40–60bps in the quarter. “Besides, with headwinds such as visa costs and wage hike behind, we expect all IT companies to benefit from operating efficiencies,” wrote Agarwal.

For HCL Tech, growth rates in product business, commentary on engineering, research & development traction in IMS (infrastructure management services) and update on products acquisition from IBM are some of the areas which will be watched closely. Most experts also expect the company to maintain its revenue and margin guidance for FY19.

“Unlike in the past, we do not expect seasonal weakness despite furloughs as some of the recent order wins will drive growth. We expect Infosys and HCL Tech to reiterate their FY19 guidance, and (other) players to give positive demand commentary without giving out any specific outlook on FY20,” wrote Girish Pai, Head of Research, Nirmal Bang.

Experts are also expecting some clarity from the IT players on the impact of the new H1-B visa regime contemplated by the US and how do they plan to manage through it. Consequently, analysts do not expect midcaps to reap the same benefits as large caps from rupee depreciation as seasonal furloughs and on-going supply chain issues might put pressure on the 3Q performance despite good deal momentum.

Analysts at Motilal Oswal said that demand fulfilment challenges are starting to weigh in on the midcaps like Hexaware, Mindtree and Persistent and the weak rupee over the past quarter will not reflect on their profitability. Wage hikes, low forex gains, large deal wins, performance of large IP business and top client spending will be among the top concern areas as far as IT midcaps are concerned according to analysts.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.