Here’s How Analysts Expect Indian Tech Companies To Fare In Second Quarter
Employees work at a software firm in Bengaluru, India. Photographer: Karen Dias/Bloomberg

Here’s How Analysts Expect Indian Tech Companies To Fare In Second Quarter

The profit of India’s five largest information technology companies by market value is expected to grow sequentially in the quarter ended September on the back of a low base due to absorption of wage hikes in the first quarter, moderating visa costs, steady deal wins and a weaker rupee.

Aggregate revenue of Tata Consultancy Services Ltd., Infosys Ltd., HCL Technologies Ltd., Wipro Ltd. and Tech Mahindra Ltd. is expected to grow 3.8 percent sequentially in rupee terms, according to Bloomberg data. Operating profit, however, is projected to increase by 8.3 percent over last quarter, while net profit may rise 3.4 percent.

Acquisitions To Boost Revenue

Revenues of the five companies are expected to grow sequentially between 0.5 percent and 6.7 percent, according to Bloomberg data, on the back of recent acquisitions, among other factors.

Infosys’ revenue growth can be attributed to a ramp-up in large deals, broad-based strength across its operating verticals and acquisition of Stater—a subsidiary of ABN AMRO Bank—Kotak Institutional Equities said in a recent report.

Yet, the brokerage indicated some adverse impact for TCS, India’s largest software company, led by weakness in its banking and financial services vertical, following slowing economic growth in Europe.

HCL’s revenue is expected to receive a boost in the quarter, with its acquisitions of IBM’s software products—made in December last year—expected to fully contribute to growth, according to separate reports by Kotak Institutional Equities, Motilal Oswal Financial Services Ltd. and Prabhudas Lilladher.

Wipro’s growth, however, is expected to be subdued while Tech Mahindra is expected to benefit from improved investments in the telecommunications sector, according to the report by Kotak.

Operating Margins To Expand

The reversal of headwinds such as visa costs and wage hike absorption may widen margins of the five information technology majors, while a weaker rupee should act as a tailwind, according to Morgan Stanley, Kotak, Edelweiss Securities and Motilal Oswal.

Increased operation costs in the U.S., growing investments in digital businesses and transition costs in large deals may work against the companies’ margin expansion.

What To Watch

  • Assessment of slowdown in Europe and potential impact in FY21.
  • Outlook on U.S. capital market and banking and financial services vertical.
  • Impact of increasing talent supply crunch on employee expenses and impact on margins.
  • Deal wins and pipeline—size of contracts and duration.
  • Allocation of 5G spectrum worldwide and outlook on communications vertical.
  • Performance of retail vertical, which has been volatile over the past few quarters.
  • Integration of acquisitions and merger strategy.
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