As the IT services companies gear up for their third quarter results starting with TCS results on Thursday, analysts expect a modest quarter-on-quarter (qoq) revenue growth in currency terms. In a seasonally weak quarter with no major cross-currency impact, Tier 1 companies are headed for a modest 1-2 per cent qoq revenue growth in constant currency terms, predict the analysis of Emkay Global Financial Services. Interestingly, the analysis expects HCL Tech to lead the QoQ revenue growth this quarter.
A report from HDFC Securities expects the IT sector to be impacted by Q3 seasonality and yet post mild revenue acceleration. As per the report, revenue growth is expected at 1.2 per cent qoq and 9.1 per cent yoy. Tier-1 IT is expected to post revenue growth of 1.2 per cent qoq, compared to 0.3 per cent in the third quarter of financial year 2016-17. Tier-2 IT is expected to grow at 1.8 per cent qoq and 11.2 percent yoy for the quarter. The report says that within midcaps, Persistent and Majesco are expected to post highest sequential revenue growth. “Cross-currency impact will be negligible following prior two quarters of strong tailwind. Operating performance is expected to be stable despite seasonal headwinds supported by increased automation and higher efficiencies. We expect IT sector aggregate EBITDA to be 22.5 per cent, down 20bps QoQ. Within tier-1 IT services companies, TCS is expected to lead operational performance while Infosys and HCL technologies are expected to lag,” Amit Chandra IT Analyst at HDFC Securities.
At the same time, analyst reports suggest that many mid-tier players are expected to report relatively better growth in the range of 1.5-3.7 per cent qoq in the December quarter. Despite this, Hexaware would be affected by client ramp downs. On the other hand, Persistent is expected to deliver strong qoq revenue growth, supported by seasonal strength in the IBM business.
“While we expect the operational efficiencies to limit the impact of seasonal weakness on operating margins, we highlight that all (11) IT services companies under our coverage would report lower EBIT margins on a year-on-year (yoy) basis,” stated Emkay Global Services. “We believe that
investors need to focus on certain elements of the ensuing results—the initial trends in CY18 budgeting cycle (and more so in financial services in North America), and digital engagements. Besides, we also look forward to Infosys’s new CEO Salil Parekh’s maiden commentary on strategic direction to navigate through the current challenging times for the IT services. We also expect Infosys to retain its revenue guidance of 5.5-6.5 per cent growth for FY18,” said an expert from Emkay.
“Within tier-two IT companies, we expect margin expansion from Persistent, Zensar, Mindtree and Mphasis. Our bullish stance on tier-two IT has been validated by a sharp re-rating in the prior quarter and we continue to be positive on the midcap IT space,” said Chandra.
It is expected that earnings will be volatile in the near-term and may give mixed direction owing to declining growth rates, select client ramp downs, weakening operating leverage, automation, investments in ‘glocal’ hiring, differential hedging strategy, acquisitions and sharp currency movements.
Investors are likely to track firms' commentary on client budget for CY18E, impact of changes in US tax policy (BEAT provisions), outlook on BFSI, retail and CPG verticals, penetration of digital services and automation impact across service-lines.