Q1 snapshot: IT sector’s revenue growth to remain stable

Earnings season is here and India Inc is expected to post revenue growth in the first quarter of this fiscal year, analysts say. 

CRISIL, in a report said that it expects India Inc’s revenue to grow by 15% in the first quarter (Q1FY17).

India's IT sector, naturally, will be keenly watched especially after the Brexit vote. 

According to its report, JM Financial estimates that IT sector will have a stable June quarter with modest 2-4% dollar revenue growth. It said that this growth will be the result of a seasonal recovery in volume and a stable cross-currency.

However, it sees pure earnings, or EBITDA (earnings before interest tax depreciation and amortization) margins to decline for most companies in the information technology space. 

Pankaj Kapoor and Abhishek Kumar of JM Financial, in a report, stated that margins would be impacted by seasonal factors such as annual wage hike and/or visa costs, mild Rupee appreciation and adjustments due to shift to Indian Accounting Standard.

The immediate impact of ‘Brexit’ will be from the adverse cross-currency movements which is expected to reflect in second quarter. Also, slower decision making on large deals/discretionary spend could affect medium-term volume growth, the duo of JM Financials wrote in the report.

Overall , a steady 1QFY17 notwithstanding, an increased uncertainty on the medium-term growth outlook following ‘Brexit’ could weigh on sector valuations, they said. 

According to Phillip Capital, following performance you can expect from the major IT players:

These companies are expected to deliver positive constant currency (CC) growth, while margins are likely to decline for them mainly led by visa cost.

Infosys – A 3.9% qoq CC (constant currency) growth is expected this Q1FY17. Also a  positive cross currency impact of 25bps would result  in 4.1% USD revenue growth. However, EBITDA margins for the company is seen to decline by 158bps. The company’s FY17 guidance will be an important factor to watch in the context of Brexit.

TCS –  CC revenue growth of 2.9% qoq and positive cross currency impact of 30bps is estimated, while, EBITDA margins view are negative  with a 145bps decline due to salary hike and visa cost. Commentary on client spends on digital and outlook of Diligenta, LatAm, and Japan will be keenly watched.  

Wipro –The Azim Premji backed company is expected  to deliver CC growth of 2.0% qoq (at mid‐point of the guidance range of 1‐3%). And that of EBIT margins to decline 56bps led by  one‐month salary hike impact and visa cost. Its guidance for Q2FY17 will be keenly watched, especially because of sustained weakness in its E&U vertical.

HCL Tech –  It’s Volvo acquisition (US$ 60mn in Q1FY17) to boost the growth.  The company is expec ted to travel with CC revenue growth of 6.2% qoq and positive cross currency impact of 20bps. Organic USD revenue growth should come at 2.6%. Margins could decline 125bps due to acquisition and visa cost.  

MindTree – CC revenue growth of 2.6% and 20bps positive cross currency impact. Margins to contract  by 22bps due to visa cost, partially weakened by higher utilisation.

It was Tech Mahindra whose performance are expected to be flat for the June quarter 2017.

Tech Mahindra – The company will see its CC revenue to decline marginally on qoq tapped by seasonally weak Comviva business. Positive cross currency impact of 20bps and also muted revenue growth of 0.1% qoq can be expected. Margins will contract by 106bps due to visa cost and Pininfarina acquisition.

In this quarter, management commentary will hold importance, especially outlook on European businesses (after Brexit) and strategy to counter sharp depreciation in European currencies, says Phillip Capital.