Good, Bad Or Ugly? How Analysts Expect India’s Software Firms To Deliver In Fourth Quarter

The March quarter of India’s five largest information technology companies may remain mixed as continued pressure on operating margin due to higher costs and currency fluctuation is likely to offset the growth in revenue on account of strong deal wins.

The aggregate revenue of Tata Consultancy Services Ltd., Infosys Ltd., HCL Technologies Ltd., Wipro Ltd. and Tech Mahindra Ltd.—the nation’s top five software services providers by market value—is expected to increase by nearly a percent sequentially, according to data compiled from their exchange filings. Their net profit is likely to rise 0.3 percent over the previous quarter, but operating margin may remain flat or even contract.

While TCS and Infosys get set to kick-start the earnings season on April 12, here’s what brokerages think are key factors for the IT companies.

Steady Deal Flow To Counter Seasonality

The deals won in the last two quarters will lead revenue growth in the three months March, according to Kotak Institutional Equities. A sharp increase in digital and new generation services has driven growth for major IT companies during the first three quarters of the just concluded financial year, it said, adding the March quarter is seasonally weak.

Margin Headwind

Talent crunch increased costs for software services exporters in the last two quarters, which had a bearing on the companies’ margins. This is expected to play out in the fourth quarter as well, according to HSBC.

The brokerages, including Jefferies, HSBC, Citi and Kotak Institutional Equities, said an appreciation of 2 percent in the Indian rupee against the U.S. dollar could further drag down the operating profit of the IT companies.

That’s because the tech firms bill majority of their U.S. and overseas clients in dollars.

Cautious On Growth Outlook

Nomura is “sceptical” about the growth of IT companies in the ongoing financial year due to weaker macro indicators, slower growth in legacy businesses and rising competition, according to its earnings preview report.

Client expenditure in the capital markets segment, especially in Europe, could be muted, Kotak Institutional Equities said in a note. Client spending in the traditional banking segment, according to the brokerage, is expected to remain steady. But large clients will remain cautious, it said. The banking and financial services business is crucial for the domestic technology companies as it contributes a large part to their revenue.

Near-term risks are now skewed to the downside as clients may postpone some long-term projects, according to an earnings preview note by HSBC.