HCL Tech, Wipro to lead top-tier IT pack in March quarter

TCS and Infosys headed for 'muted' dollar-revenue growth, say brokerage reports

HCL Tech, Wipro to lead top-tier IT pack in March quarter

While the first three quarters of FY14 indicated a healthy surge in outsourcing demand for the $86 billion Indian software exports industry, last quarter of the fiscal is in for a mixed-bag performance. Country’s blue-chip IT-services companies are projected to post divergent top-line growth during the January-March stretch, a seasonally soft quarter.
 
Brokerage houses tracking the sector expect HCL Technologies and Wipro to lead the IT pack, with top-two heavyweights TCS and Infosys ending the quarter on a 'muted' note. According to estimates by multiple brokerages, HCL Technologies is projected to report sequential dollar revenue growth in the range of 3.2-3.4 percent followed by Wipro at 3 percent, which is within its guidance range of 2-4 percent for the March quarter.
 
Hit by its weak domestic business, country’s largest software-services company TCS, is expected to post revenue growth of about two percent during the January-March period. TCS reported a 3 percent sequential growth in the preceding December quarter.
 
In the October-December period, among the top-tier IT players, Noida-based HCL Tech posted the highest sequential dollar revenue growth at 4 percent followed by TCS at 3 percent. During the quarter Wipro reported a 2.9 percent growth, the company's highest sequential rise in the last eight quarters, while Infosys posted a growth of 1.7 percent. Among the top-four Indian IT players, HCL Tech is the only company to follow July-June financial year.
 
As the IT-earnings season for the fourth quarter kicks off on April 15, with Infosys announcing its results, analysts expect the Bangalore-based company to report a sequential decline in dollar revenue by 0.3-0.4 percent in Q4 largely due to slowdown in its retail and hi-tech business and cancellation of some of its projects.
 
Last month Infosys projected to touch the lower-end of its revenue outlook for FY14, indicating “choppy” near-term performance as its clients in some sectors are still struggling to grow. Retail, consumer packaged goods (CPG) and high-tech verticals together contribute about 25 percent of the company’s overall revenue.
 
Mumbai-headquartered TCS recently at an analyst meet indicated that along with expected seasonal softness in mature markets, domestic revenue is also likely to be weak during the March quarter due to a hit in IT spends ahead of the upcoming general elections.
 
Traditionally January to March is a lean stretch for IT companies as client budgets are finalised during the period for the next fiscal and revenues do not accrue for the full quarter. “The IT spend happens heavily in the following quarters. We expect revenue growth in the March quarter to be largely volume driven. Volume growth is expected to be in the range of 0-2.5 percent sequentially for tier-I IT companies,” Angel Broking noted in its latest report.
 
According to brokerages margins are likely to be stable for the top-four IT-services players during the January-March period. However, recently TCS hinted at a sequential decline in its earnings before interest and taxes (EBIT) margins by about 40-50 basis points (bps) largely due to ongoing investments to enter newer geographies and services lines. TCS maintained that margins may stabilise in the 27-28 percent band in the long run.
 
“We expect the impact of rupee appreciation on the sector’s EBIT margins to be minimal given that, on average, the rupee remained mostly flattish during the March quarter,” Barclays noted in its report, adding that EBIT margin at Infosys is expected to improve by 50 bps sequentially backed by cost-optimisation measures adopted by the IT major in the last two quarters.
 
Owing to wage hikes, HCL Tech, is likely to see a decline in its margin by 55 bps in March quarter, while for Wipro it is expected to remain flat, says Barclays.
 
Since the beginning of fiscal 2014, the export-heavy Indian IT sector has managed to sustain the earnings momentum backed by increased outsourcing spend in the US, its largest market and a healthy deal pipeline.
 
“We expect volume growth for tier-I Indian IT companies to be in the range of 10-14 percent for FY14,” says Ankita Somani, IT analyst, Angel Broking.
 
 According to Kotak, profit after tax (PAT) is likely to grow by about 1.2 percent on an average for the top-four IT-services players during the January-March period.
 
For fiscal 2014, Nasscom predicted the Indian IT industry to grow at 12-14 percent, while for FY15 it has projected the industry to grow at 13-15 percent.
 
“The overall demand scenario has remained stable and improved across sectors. This should bode well for calendar year 2014 budgets. Discretionary spends have been improving and we will watch out for comments. Order bookings in re-bids market by various players will also be a point of interest,” says Dipen Shah, head, private client group research, Kotak Securities, adding that pricing is expected to remain stable. “We will closely watch the management commentary about their expectations on the same. We understand that, competitive intensity has increased.”
 
Pricing pressure is largely on the non-discretionary spend including traditional businesses like testing, infrastructure services and application development and maintenance (ADM). Analysts point out that earlier for such contracts if the rate would be over $25 per hour, it has now been reduced to around $20 per hour.
 
Earlier considered as an indicator of IT industry’s overall performance, Infosys has failed to meet the upper end of its revenue outlook over the last few fiscals. Infosys saw its revenue growth rate plunging to 5.8 percent in 2013 from 26 percent in 2011.
 
“Infosys expects to be at the lower end of its FY14 dollar revenue guidance of 11.5-12 percent, which implies a 0.4 percent quarter-on-quarter fall in Q4,” Japanese investment bank Nomura noted in its report.
 
According to HDFC Securities Institutional Research 'robust traction' in infrastructure management (IMS) services is likely to aid HCL Tech’s dollar revenue growth by 3.4 percent sequentially in the March quarter, the highest among the tier-1 players. For HCL Tech infrastructure is its fastest growing vertical, which at present is over $1 billion in revenue.
 

Show More
Post Your Comment
Required
Required, will not be published
All comments are moderated
e-Lections 2014: How Political Parties Turned Tech-Savvy
Daiichi could be the biggest beneficiary of the Sun Pharma-Ranbaxy deal