The profit of India's five largest information technology companies is expected to fall in the first quarter as increased employee costs, volatile economic outlook in the U.S. and currency fluctuation are likely to offset higher revenues.
Aggregate revenue of Tata Consultancy Services Ltd., Infosys Ltd., HCL Technologies Ltd., Wipro Ltd. and Tech Mahindra Ltd. is expected to growth 0.3 percent sequentially in rupee terms, according to Bloomberg. Operating profit, however, is projected to decline 4.3 percent, while net profit may drop 6.3 percent.
TCS kick-starts the earnings season on July 9.
Revenues To Remain Steady
Revenue of TCS, Infosys and HCL Technologies is expected to rise between 1 percent and 1.2 percent sequentially aided by deal wins in the last three quarters.
“Our channel checks indicate demand across the board remains robust and this should reflect in strong deal wins and positive management commentaries,” Edelweiss said in a note.
Digital services business would continue to drive growth with higher adoption by enterprises, according to the note. Seasonal weakness may affect the rupee revenues of Wipro and Tech Mahindra, according to the brokerages.
Operating Margins To Suffer
The earnings before interest and taxes of the five companies are expected to decline compared with the quarter ending March. That, according to analysts from Ambit Capital, HSBC, Edelweiss and Nomura, may be due to annual upward wage revision and higher visa costs.
HCL's investments in the seven IBM products that it acquired last year for $1.8 billion will impact its operating margin, Nomura said in a report.
Higher sub-contractor costs would continue to weigh on margins as in the previous two quarters. That's due to companies setting up operations in the U.S. following a political backlash against outsourcing and hurdles for visa applications for highly-skilled workers to the country. Supply-side issues in the U.S., immigration risks, resulting in higher subcontractor costs and wage hikes to retain talent, are among the other factors expected to affect earnings, according to a preview note by Nomura.
What To Expect?
- Trends likely to play out in FY20 in digital services.
- Outlook on talent supply and reskilling costs in the year.
- Impact of global trade tensions and Brexit, if any.
- Commentary on changing client requirements.
- Initial indications on client spending and budgets.
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