IT sector: Donald Trump, rupee worsen matters in December quarter
The recent appreciation in rupee may worsen matters for Indian IT firms as profit margins are already under pressure owing to increased investments in building digital capabilities
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Growth of information technology (IT) services firms continues to decelerate on a year-on-year basis. Growth in constant currency terms stood at 8.7% for tier-I IT companies in the December quarter, excluding Cognizant Technology Solutions Corp., according to data collated by Nomura Research. Two quarters ago, growth stood at over 10%, and a year before that, growth was in the teens.
Of course, that growth rates have been declining in the IT sector is well known and, as a result, IT stocks have underperformed the Nifty 50 index by around 18% in the past year.
The moot question is if the December quarter results give signs of a possible turnaround. Investors will be disappointed there. Nomura’s analysts point out that growth in the key US region was the slowest in 12 quarters. Growth in some of the industry verticals that were doing well in previous quarters, such as retail, healthcare and telecom, slowed in the December quarter. And the performance of the largest industry vertical—banking, financial services and insurance (BFSI)—gave no hints of a turnaround. Besides, as US firms await the broad policy direction of the new government, there may be some delays in taking decisions.
Of course, there are some silver linings. Companies, for instance, are sounding more optimistic, especially with regards to demand from BFSI. Besides, analysts at Kotak Institutional Equities say the intensity with which some large corporations shifted work to captive units earlier has abated to an extent.
But, from the looks of it, things are likely to go further south before any turnaround comes about. The recent appreciation in the rupee is likely to worsen matters for Indian IT companies. Profit margins have already been under pressure, owing to the increased investments in building digital capabilities and thanks to pricing pressure in the traditional application maintenance work. Besides, all of the noise against H1B visas in the US may result in new laws that increase costs of providing on-site services. Kotak’s analysts wrote in a note to clients, “In case the rupee were to sustain at current levels, we do highlight that many traditional levers of the industry are exhausted... Our EPS (earnings per share) estimates for FY2018/19 are based on INR/USD rate of 68 and have 5-9% downside risk at spot prices.”