Q3 Results Preview: What Analysts Expect From Indian IT Companies
Profit of India’s five largest IT companies is expected to rise in the seasonally weak third quarter on the back of deal wins.
The profit of India’s five largest information technology companies by market value is expected to rise in the seasonally weak October-December period on the back of steady deal wins over the last three quarters.
The aggregate revenue of the five largest Nifty 50 IT companies—Tata Consultancy Services Ltd., Infosys Ltd., HCL Technologies Ltd., Wipro Ltd. and Tech Mahindra Ltd. is expected to grow 2.5 percent sequentially in rupee terms, according to Bloomberg. Operating profit is projected to grow 3.2 percent, while net profit may rise 1.1 percent sequentially in the quarter ended December.
Infosys kick-starts the earnings season on Jan. 10.
Revenue Growth
Revenue growth of all the five IT companies is expected to be aided by the greater number of contract wins in the third quarter despite furloughs, or leaves, during in the holiday season.
Kotak Institutional Equities expects deal momentum to continue with strong contract values in the three-month period, even as it expressed concern at the sluggish growth in banking and financial verticals.
WATCH | How Indian IT Companies Are Likely To Fare In Q3
Operating Margin
The earnings before interest and taxes of TCS, Infosys and Tech Mahindra is expected to improve over the previous quarter while that of Wipro and HCL Technologies may fall.
Rising costs of subcontractors and talent shortage may continue to weigh on costs, Nomura said, adding that their investments to service recently signed large deals could work against operating margins. That could be countered by the high-margin digital business, which continues to gain a greater share of the revenue pie, the brokerage said.
The depreciation of the rupee against the U.S. dollar may partially aid operating margins, Kotak Institutional Equities said. That’s because software services provide services overseas and get paid in dollars.
What To Look Out For In IT companies’ Q3 Results 2019-20
- Assessment of slowdown in Europe and potential impact in FY21.
- Early signs of discretionary spending from clients in the U.S. and Europe.
- Outlook on the U.S. capital market and banking financial vertical.
- Deal wins and pipeline—size of contracts and duration.
- Allocation of 5G spectrum across the globe and outlook on communications vertical.
- Performance of retail vertical which has been volatile over the past few quarters.
- Integration of acquisitions and merger strategy.