India's information technology (IT) companies are expected to report subdued earnings in what has historically been a seasonally strong quarter after several managements raised concerns over conservative client spending in the U.S. and Europe.
An aggregate of the top eight Indian IT companies projects 0.4 percent revenue growth but a 0.9 percent contraction in net profit when compared to the first quarter of financial year 2016-17. The sector's earnings before interest and taxes (EBIT) is expected to decline marginally quarter-on-quarter.
What's Behind The Expected Weakness
One reason behind the conservative expectation is concerns raised by companies over the lack of spending in the Banking Financial Services and Insurance (BSFI) segment by overseas clients. Growth is expected to be slower owing to client-specific challenges such as project delays, slower ramp-ups and cancellations.
The depreciation of the British pound and stable Indian rupee is likely to have an adverse impact to the tune of 50-130 basis points on the revenue, according to earnings estimates from IDFC Securities, Axis Capital and Edelweiss. Margins may see pressure in some cases to factor in full impact of salary hikes and low utilisation rates.
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What To Watch
Management commentary on outlook for traditional businesses like BFSI and retail, especially from TCS and Infosys, will be important. Investors will also watch out for plans on company initiatives in social, mobile, analytics and cloud (SMAC) solutions as they seek to expand in newer areas.
Infosys has guided for 10.5 to 12 percent constant currency revenue growth in the financial year of 2016-17 but brokerages, including Edelweiss, IDFC Securities and Axis Capital, expect the management to lower guidance for the year.
While the full impact of the Brexit referendum on IT businesses over the medium term still remains unknown, investors will pay close heed to management commentary for more clarity on these issues. Deal wins, client additions, and pricing in a subdued demand environment will be other areas to keep an eye on.
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