After a blockbuster September quarter that saw most of India’s top software exporters deliver strong results, analysts expect a softer quarter for companies such as Tata Consultancy Services Ltd and Infosys Ltd because of the holiday season.
For the December quarter, revenue at the top four Indian outsourcing firms and US-incorporated Cognizant Technology Solutions Corp. is expected to grow by 1.5-3% over the preceding three months, according to a Thomson Reuters poll of eight brokerages. In the September quarter, these firms recorded sequential revenue growth of 3-5%.
With furloughs at major client sites and budgets getting postponed to the next fiscal year, Indian information technology (IT) firms traditionally see a drop in volumes in the December quarter. Net profit for the top five firms is expected to grow by about 10%, helped partly by favourable foreign exchange rates. India’s top IT firms generate most of their revenues in dollars.
TCS and Infosys have indicated a weaker December quarter on account of the long holiday season that results in fewer working days at client sites.
At Infosys, India’s second largest software exporter, growth may slow mainly because of the churn within the company.
During a meeting with Nomura Equity analysts in December, Infosys indicated that revenue growth would be choppy over the next two quarters as the company would take time to absorb the recent internal changes put in place by founder and chairman N.R. Narayana Murthy.
“There is an unpredictability in our performance; there is a choppiness in our growth patterns, which I don’t see going away in the near future, unfortunately, because we need to see five-six good quarters of order booking, which will allow me to say, ‘I’m out of the woods’. But till then, you’ll see this choppiness, this volatility in our performance,” Infosys chief financial officer Rajiv Bansal said at a investor conference in November.
Infosys, the former industry bellwether that has seen an unprecedented exodus in its top management in the past six months, will kick off the earnings season and announce its closely watched results on 10 January.
“For almost all the IT vendors, margins would be impacted because of wage increases on the one hand, and a lacklustre revenue growth on the other,” said analyst Sandeep Muthangi of India Infoline Ltd. “Further, barring TCS, Wipro and Infosys, forex losses are likely to have a significant impact on PAT (profit after tax) growth at other IT companies.”
“We expect ~3% (±0.5%) sequential growth for the top 5 IT firms,” said Hitesh Shah, director of equity research at IDFC Securities. “Margins would be in a narrow band in the absence of any major currency movement. However, we expect the commentary to be positive on the back of a healthier demand environment for IT outsourcing.”
Muthangi signalled that despite the lukewarm commentary from Infosys, the company could end up delivering a healthy quarter.
“Although furloughs are a headwind for all IT companies in the December quarter, we estimate that Infosys will record revenue growth of 2% (cc, QoQ) due to continued ramp-ups on its deal wins. We also expect margins to improve for Infosys by 90 bps (basis points) due to its recent cost-cutting initiatives,” said Muthangi.
A number of experts do not rule out the possibility of Infosys increasing the top end of its full-year revenue guidance to 12%, which would bring it at par with average industry growth estimates for this fiscal year. Infosys’s revenue growth forecast for the 2014 fiscal year is 9-10%, after the company raised the lower end of its estimates from 6% following its October quarter earnings announcement.
Experts also pointed out that despite the December quarter being a seasonally weak one, most top firms have performed better in the second half of the year so far as compared to last year.
For the last fiscal year, industry lobby Nasscom had forecast that software export revenues would grow at 11-14%. However, with top clients tightening spending on technology services, the Indian IT sector witnessed its slowest year of growth since the 2008 global financial meltdown and software exports grew at barely 10% for the year.
“A combination of healthy demand environment in North America and early signs of success in accelerating share gains in Europe pose upside risks to our estimates,” said Kotak Institutional Equities in a brokerage note last week.
“The second half of this year has been better than the last year. As we are getting into new year, over the last couple of quarters, we have seen companies doing a little better than last year,” said Sudin Apte, chief executive of outsourcing advisory firm Offshore Insights.
Apte added that growth among the top IT firms would not be divided equally and that polarization in growth rates would continue, with TCS and Cognizant set to consolidate their positions at the top and grow faster than former sector poster boys Infosys and Wipro.
“Sequentially as well, the (December) quarter has been good because initiatives came back, companies started new projects and discretionary spending rose. We have also seen decision-making picking up a little speed,” he said.