India’s Top IT Firms Set To Report A Drop In Revenue In Q1 FY21
The drop in operating and net profit is expected to be much sharper.
India’s biggest software services exporters are expected to report a decline in revenue in the quarter ended June as decisions on deals and project execution got delayed after the coronavirus pandemic froze economic activity.
Analyst estimates compiled by Bloomberg pegged the aggregate revenue of the five Nifty 50 IT companies—Tata Consultancy Services Ltd., Infosys Ltd., HCL Technologies Ltd., Wipro Ltd. and Tech Mahindra Ltd.—to decline 2.5% sequentially in the three-month period. The drop in operating and net profit is expected to be much sharper.
All activities, barring essential services, were shut as the novel coronavirus outbreak forced the nation to impose the world’s biggest lockdown for more than two months. That led to a rise in cost for the IT firms as most employees worked from home. The companies also lost billings as they generate most of their business overseas and the bulk of it comes from clients in financial services, manufacturing and communications sectors.
Revenue
In the quarter ended March, several large IT companies indicated that the disruptions caused by the pandemic limited outlook on revenue and earnings. While Infosys, HCL Technologies and Wipro temporarily suspended the practice of offering revenue and margin guidance, TCS expects its revenue to contract in the ongoing financial year.
The concerns spelt out were twofold.
- The ability to service clients. The industry’s workforce has shifted to work from home, leading to loss of productivity and a delay in execution of projects.
- Large clients putting projects on hold and delaying decisions on new deals.
The initial fears of a sharp fall in revenue for the sector have subsided. A mid- to high-single-digit decline in the current environment is still creditable and that the key now is recovery, HSBC Securities said in an earnings preview note.
While Investec Research said pricing of products and services have not reduced as much as expected by the managements, Motilal Oswal said demand still remains subdued, owing to slackness in retail, travel and transportation, hospitality and aerospace verticals.
Operating Margin
The operating margin of IT companies is expected to contract because of a drop in revenue.
A fall in employee utilisation levels and negative operating leverage, according to Motilal Oswal, could hurt margin but that should be partly offset by the rupee depreciation and deferral of salary revisions.
Watch Out For
- Clarity on client plans and budgets in uncertain times.
- Challenges to new customer acquisition in Covid-19 environment.
- Deal wins and pipeline—size of contracts and duration.
- Assessment of slowdown in the U.S. and Europe and potential impact in FY21.
- Commentary around expected pressure on pricing.
- Currency movement benefit and receivables will be another important area of investor focus.
- Outlook on the U.S. capital market and banking financial vertical.