How India’s Top IT Firms Are Expected To Fare In Fourth Quarter
Despite a weaker rupee, Q4 results of Indian IT firms are expected to mirror disruption caused by coronavirus pandemic globally.
India’s biggest IT companies are expected to report a decline in quarterly earnings as the coronavirus pandemic upended economies worldwide and disrupted trade.
Analysts’ estimates compiled by Bloomberg pegged the aggregate net profit of the top five software services exporters—Tata Consultancy Services Ltd., Infosys Ltd., HCL Technologies Ltd., Wipro Ltd. and Tech Mahindra Ltd.—to fall 3.3 percent sequentially in the quarter ended March. The combined revenue and operating profit are expected to grow 1.2 percent each during the period.
The novel virus has shut businesses temporarily as India went into the world’s biggest lockdown to contain its spread. IT firms are expected to see a disruption as they generate most of their business overseas and the bulk of it comes from clients in financial services, manufacturing and communications sectors. That too when the rupee trades at a record low level against the dollar.
Amid these uncertainties, analysts expect India Inc.’s earnings to drop in the fourth quarter. Wipro will kick-off the fourth-quarter earnings season on April 15, followed by TCS on April 16.
Muted Revenue Growth
The loss of billings from Covid-19-led lockdowns in India and developed markets towards the end of the quarter is likely to weigh on the top line, according to Kotak Institutional Equities. Disruption in work in India, select European countries and the U.S. is also expected to adversely impact revenue, with most weakness seen in travel, hospitality and energy segments, the brokerage said in a report.
According to Motilal Oswal, while most companies did a commendable job to adapt and work from home, not all service offerings were amenable to the new conditions. There was lower productivity and both billings and utilisation levels are expected to see an impact, it said.
Guidance Uncertainty
Global peers of Indian IT companies have reduced annual revenue growth projections.
While Cognizant Technology Solutions Corp. withdrew its forecast for the year, Accenture lowered its revenue projection to 3-6 percent from 5-8 percent because of anticipated disruptions in businesses amid the Covid-19 outbreak. SAP AG, which has a business of software licences, cut its revenue guidance to 1-3 percent for the ongoing financial year from 6-8 percent estimated earlier.
For the Indian IT sector, FY21 outlook is “hazy” as economic consequences of Covid-19 filter through deceleration/ decline in global spending and consequently revenues of software services companies, said Kotak Institutional Equities.
According to BofAML, annual guidance from likes of Infosys and HCL Technologies will be “accompanied by assumptions around removal of lockdowns and extent of economic impact”.
Motilal Oswal said even if companies were to forecast, the guidance bands are likely to be broader than the usual 2 percent to account for the uncertainties.
Watch Out For
- Challenges to new customer acquisitions under Covid-19 environment
- Assessment of slowdown in the U.S. and Europe and potential impact in FY21
- Progress in end-to-end digitisation which may have seen improvement
- Commentary around expected pressure on pricing
- Rupee depreciation benefit and receivables will be another important area of investor focus—a weaker home currency benefits IT firms as they bill a majority of their overseas clients in U.S. dollars.
- Outlook on the U.S. capital market and banking financial vertical
- Deal wins and pipeline—size of contracts and duration