IT Q3 Results Preview: Seasonal Weakness To Weigh On Growth

Indian information technology majors are set to report their December quarter results, with Tata Consultancy Services Ltd. scheduled to kick off the earnings season on Jan 9.

In a seasonally weak quarter, the IT sector’s growth is expected to be weighed down by furloughs. While rupee depreciation could have provided some relief, margins are expected to remain flattish.

The aggregate revenue growth in the third quarter is expected to moderate slightly to 0.7% sequentially in constant currency terms, given usual seasonality, according to Jefferies.

DAM Capital Advisors Ltd. notes that sequential growth in constant currency terms could range between (−)0.4% and +4.3%. HCL Technologies Ltd. is likely to outperform in Tier I, while Persistent Systems Ltd. and Coforge Ltd. are expected to lead in Tier II.

Margins are expected to remain flattish in the third quarter. “Companies are likely to report mixed performance on margins. Companies with wage hikes — Wipro, LTIMindtree, and BirlaSoft should report a decline in margins. For Tier-1 companies, we expect margins to see a fluctuation of (–)140 bps to +100 bps, while we expect margins to vary by -160 bps to 60 bps QoQ for mid-caps,” Emkay Global Financial Services Ltd. said in its report. 

The depreciation of rupee against dollar is expected to help margins a "bit on a QoQ basis", Jefferies noted. However, JM Financial Share & Stock Brokers Ltd. said that a cross-currency headwind could also erode benefit of rupee depreciation on margins, at least partially. 

A flat revenue growth is expected with 95 basis points of cross currency tailwind, translating into a 1% sequential depreciation in revenue growth in dollar terms, according to JM Financial. 

The growth should be flattish as "we expect growth momentum in BFSI and Hi -Tech will be offset by decline in regional markets revenue (driven by BSNL)", DAM Capital noted.

What to watch out for:

• Demand outlook

• BSNL deal ramp-down schedule 

• Margin outlook 

Infosys is expected to see deceleration in revenue growth after a strong first half of the fiscal, with 0.5% sequential growth, according to DAM Capital.

The weakness will be led by higher base of mega deal ramp ups in the first half, and furloughs and weakness in auto and hi-tech business segments. This will be offset by traction in BFSI, it added.

The margins are expected to be flattish led by weak revenue growth, DAM Capital said.

JM Financial expects Infosys to revise its guidance to 4%-4.5% year-on-year in constant currency terms. 

What to watch out for:

• Large deal closures 

• Update on discretionary spending 

• Hiring plans 

Wipro is expected to record 1.3% sequential decline in revenue in IT services segment after factoring in 80 basis points of cross currency headwinds, as per Emkay Global.

The company's EBIT margins expected to decline by 30 basis points sequentially due to an incremental two-month impact of salary hike, it added.

JM Financial expects Wipro to guide for a "-1% to +1%" sequential growth in constant currency terms in the third quarter. 

What to watch out for:

• Consulting business growth

• Demand trends across sectors 

• Deal win momentum 

Tech Mahindra is expected to report a 0.3% growth in constant currency terms, according to JM Financial. The brokerage added that 120-basis point currency headwind should result in a 0.9% decline in dollar revenue.

A sequential improvement of 10 basis points is expected in EBIT margin, which would be "largely driven by Project Fortius", it added.

Meanwhile, the company's revenue growth in constant currency terms is expected across telecom and non-telecom businesses. "Comviva in telecom and BPO in enterprise will help offset furloughs," it further said.

What to watch out for:

• Revenue growth and margin outlook

• Demand outlook and trends 

• Pricing and deal intake