BackTop IT firms’ revenue, margins, profits may dip in Mar quarter
Top IT firms’ revenue, margins, profits may dip in Mar quarter
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Mumbai: The top four Indian software service providers are expected to report subdued growth in revenue, flat-to-negative margins, decline in profit and even a marginal drop in pricing in the quarter ended 31 March, according to analysts.
Wipro Ltd and HCL Technologies Ltd are expected to record better volume growth in the March quarter than their larger rivals—Tata Consultancy Services Ltd (TCS) and Infosys Ltd.
However, all four companies are expected to post lower margins and profits in the seasonally weak quarter, especially since firms that outsource their information technology (IT) needs were yet to decide on their budgets for 2012, increasing the uncertainty over their spending plans.
Infosys will kick off the earnings season on 13 April.
A 30 March report by the institutional equities division of brokerage Nirmal Bang Securities Pvt Ltd expects the top four IT companies to post 1-3% quarter-on-quarter (q-o-q) volume growth in the fourth quarter of fiscal 2012 because of a delay in finalization of calender year 2012 IT budgets.
It factored a 0.2-1.1% dip in pricing and doesn’t expect any significant impact on the currency front.
“Overall, we expect a mere 0.3-2.9% q-o-q dollar revenue growth for the top four IT firms combined, while in rupee terms we expect a negative 2% to positive 1.5% sequential growth owing to slight rupee appreciation (1.4% q-o-q on quarterly average)," said Harit Shah, an analyst at Nirmal Bang. He expects the margins of these top IT companies to remain flat-to-negative, resulting in lower profits.
The report expects a combined 76 basis points (bps) q-o-q decline in operating profit margins, or earnings before interest, tax, depreciation and amortization (Ebitda) margins of these four companies for the March quarter at 26% (26.8% in the third quarter of FY12), mainly on slower revenue growth and higher wage costs. One basis point is one-hundredth of a percentage point.
It expects TCS to report a steep 162 bps and Infosys a 40 bps q-o-q fall, while Wipro and HCL Technologies may report “largely flattish margins".
Shah expects TCS and Infosys to register a net profit decline of 5.1% and 2.2% q-o-q, respectively, while HCL Technologies and Wipro are expected to report 3% and 3.8% q-o-q growth, respectively.
Kotak Institutional Equities’ analysts, too, expect a soft quarter and “cautious near-term" commentary from Indian IT companies in the fourth quarter. The analysts expect 0.8-3% q-o-q dollar revenue growth for tier I companies. Wipro, the analysts said, is likely to report the highest sequential revenue growth among these firms.
However, analysts from ES Financial Services Inc. are not bullish over HCL Technologies’ prospects. According to a 21 March report by the firm, HCL is relatively better placed than peers to handle margin pressure as revenue growth is expected to remain strong, but given that IT budgets will largely remain flat in 2012, growth will be driven through market share gains and vendor churn within clients, which will put pricing pressure on the company.
S&P expects Wipro’s revenue for FY12 to grow at 18-20% against its previous estimate of a low double-digit growth. “We believe this reflects the management’s focus on pursuing revenue growth after a restructuring last year," said Dangra.
A sharp depreciation in the Indian rupee against the dollar over the past nine to 12 months also supports Wipro’s revenue growth, he said.
Analysts will keenly watch Infosys’—which is gradually losing its bellwether status—forecast for the current fiscal when it declares its fourth quarter earnings.
“We believe that Infosys will likely guide to a 12-15% dollar revenue growth guidance for FY13. If this be so, this will be less of a surprise to investors today. We think that Infosys will likely articulate through its guidance its oft stated intent to grow faster than industry (as per Nasscom, the Indian IT exports industry will grow at 11-14% in FY13, 11% thus being the low bar for Infosys)," said a 26 March report by JPMorgan.
“Infosys is likely to guide, and in that case, it will guide for a 9-12% dollar revenue growth and earnings per share (EPS) of ₹ 159-166 for FY13E," said Kotak analysts.
According to a 30 March IIFL Institutional Equities report, Infosys’s revenue forecast (year-on-year, or y-o-y, $, top-end) has been lower than Nasscom’s (y-o-y, $, top-end) in two of the past five years. “Again in FY13, we believe it will likely be lower than Nasscom’s (14%). Our interactions with the management indicate that unlike TCS, which witnessed a pick-up in traction towards the end of the fourth quarter of FY12, for Infosys, traction continues to be weak," said the report.
Meanwhile, analysts have a “wait-and-watch" attitude on Tech Mahindra Ltd’s recent announcement of its merger with Satyam Computer Services Ltd. (rebranded Mahindra Satyam), which has made the combined entity—with over $600 million in revenue per quarter—the fifth largest in the India IT services sector.
In the three months ended 31 March, Infosys shares rose 3.26% while BSE’s benchmark Sensex gained 13.86%. Over this period, the shares of TCS advanced 1.52%, HCL 29.93%, and Wipro 11.6%. The BSE IT Index rose 6.29% in the quarter.
Ashwin Ramarathinam contributed to this story.
leslie.d@livemint.com
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