IT companies to post strong Q2 growth

MUMBAI: Boosted by an improving demand environment, a stable US economy and increase in project awards, top software services companies are expected to maintain strong revenue growth for the July-September quarter (Q2FY15). This is even as a latest Citi report on the sector said the future upside for IT was limited.

In the second quarter estimates, sector leader Tata Consultancy Services (TCS) may lead the charge with a quarter-on-quarter jump of up to 9%. Compared to TCS’s strong growth, Infosys and Wipro are both expected to report a 3-4% jump in revenues while HCL Tech may clock a slightly higher 4.4%, IT analysts predicted. However, TCS’s strong growth could partially be attributed to its acquisition of an IT company in Japan.

Despite expectations of steady growth in revenues and net profit, analysts at Citi have turned bearish on the sector. “Following strong outperformance (about 45% in two years), relatively full valuations and multiple changes in the IT landscape, we are toning down our optimism. The sector trades at about 18.5 times one-year forward. The last time it traded at that level was when the top four companies were growing at about 25% (compared to about 10-15% now),” the Citi analysts, Surendra Goyal and Rishi V Iyer, wrote in a note.

On the quarterly performance, according to Barclays Capital, while TCS is expected to report a 5.2% rise in net profit to Rs 5,320 crore, Infosys net is expected to show a 7.2% jump at Rs 3,090 crore. Wipro, however, is estimated to report a 1.2% drop in net profit at Rs 2,120 crore while HCL Tech is seen reporting a 5.5% drop to Rs 1,730 crore.

Infosys is expected to kick off the results season this Friday. During Infosys’s results announcement, “investors will keenly track (its) commentary regarding changes in its strategy going ahead under the new CEO, Vishal Sikka”, said Sandip Agarwal and Omkar Hadkar of Edelweiss Securities.

Investors will mainly look for better insights into Sikka’s ‘Design Thinking’, in which the basic premise is to successfully approach and solve difficult, multi-dimensional problems. According to Sikka, Design Thinking is expected to be Infosys’ core strategy for the future, Shashi Bhusan and Hussain Kagzi of Prabhudas Lilladher wrote in a note.

Barclays Capital’s Bhuvnesh Singh and Hitesh Das said, while Infosys is expected to report a revenue of Rs 13,300 crore — a jump of 4.4% on the quarter, “the key investor focus, however, will likely be on management commentary about the new strategic path of the company under the new CEO and what new steps would be implemented to bring the company back to an industry level growth path”.

Barclays also said that, recently, the TCS management had indicated that growth in banking and financial services (BFS) would likely be better than Q1FY15 while smaller verticals such as media, travel and life sciences may witness some moderation. In addition, its domestic business is also likely to deliver better than company average growth in Q2FY15.

On the exchange rate front, during the past few years, the rupee has depreciated against the dollar, which helped IT companies to fight dipping margins, said Harit Shah at Karvy Stock Broking. Even post the Lok Sabha Elections this year, the rupee has not appreciated, which is a positive for Indian IT, Shah said.

In terms of US dollar, however, revenue growth could be slower as some of the other major currencies like euro, Japanese yen and pound sterling have depreciated against the greenback during the quarter. “This is likely to impact dollar revenues across the top tier by 40-60 basis points,” said Ashish Chopra and Siddharth Vora at Motilal Securities.