Information technology: slowdown worse than expected
The June and September quarters are typically the strongest for the information technology (IT) sector. But there was nothing exciting about the June 2016 quarterly results for Indian IT firms. In constant currency terms, revenue grew 3.1%, 1.7%, -0.2% and 3.3% sequentially for Tata Consultancy Services Ltd (TCS), Infosys Ltd, Wipro Ltd and HCL Technologies Ltd, respectively.
Some IT firms have issued profit warnings ahead of the September quarter results, which means things are unlikely to get better anytime soon. “Tight-fisted financial services (customers), lower discretionary spending by some and a slow start to the year will likely constrain industry growth to single digits in FY17”, analysts at Kotak Institutional Equities wrote in a note to clients.
Each of these firms reported sluggish growth in the key US market and in the important banking, financial services and insurance (BFSI) segment.
“We expected financial services to be weak though the intensity appears to be far higher. The financial services vertical grew 3.1% q-o-q (quarter-on-quarter) for the five large companies, lower than average growth. Commentary of TCS, Cognizant (Technology Solutions Corp.) and HCL Tech also points towards moderating growth in the financial services vertical. Early signs of weakening discretionary spending also contributed to the weak quarter”, Kotak’s analysts said.
Infosys Ltd, which was expected to lead top-tier firms in terms of growth in fiscal 2017, cut its growth target to between 10.5% and 12%. Now, it is expected to grow only in the single digits after it announced the loss of a large contract in August, about a month after it unveiled its June quarter results.
Analysts were already expecting companies such as TCS and Wipro to grow in single digits, but things have worsened since the June quarter.
Not surprisingly, the Nifty IT index has corrected by more than 7% since the beginning of the June quarter earnings season, while the broader market has risen by over 4% during the same period.