Software companies may post strong performance on deal flow

Software companies may post strong performance on deal flow

Bangalore/Mumbai: The country’s top software firms begin reporting results for the September quarter this week, expecting a slow rebound in deal flow to help them register the strongest growth in sequential revenue in six quarters as the economic climate improves in the US, the world’s largest technology market

Analysts see the July-September quarter as the start of a renewed surge for information technology (IT) firms, expecting double-digit growth by next year, led by spending by the US financial services industry. An indication of the upbeat business climate is that most large tech firms are absorbing campus offers they made last year, besides making lateral hires.

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The recession in the US, precipitated by the meltdown in the financial services industry, led to cuts in technology budgets, resulting in a slowdown in business for Indian software firms. The financial services industry, which accounts for 40% of India’s software exports, is also the first to show signs of recovery.

“Recovery is happening, but it is too slow. The financial services industry has got their arms around the problem and is going about fixing it," N. Chandrasekaran, the new chief executive (CEO) of Tata Consultancy Services Ltd (TCS), India’s largest IT vendor, told reporters on Tuesday. “That means more business for us."

Unemployment rates in the US, which accounts for nearly two-thirds of India’s software exports, touched a 26-year high of 9.8% in September, as job losses continued even in a stabilizing economy. This should be taken as a note of caution even as customers begin spending on new projects, said Krishnakumar Natarajan, CEO of MindTree Ltd, a mid-tier IT services firm. It was too early to celebrate a full-blown recovery, he said.

Infosys Technologies Ltd, India’s second largest software firm, is set to report its second quarter (Q2) results on Friday. TCS will report on 16 October, Wipro Ltd on 27th and HCL Technologies Ltd, which follows the July-June fiscal year, on 28 October. HCL will be reporting its first quarter results.

“The quarter is, in our view, a mere start of a multi-quarter earnings upgrade cycle ahead," wrote Bhavtosh Vajpayee and Nimish Joshi, equity analysts with CLSA Asia-Pacific Markets on their outlook for IT services on 5 October.

Infosys is expected to beat its dollar guidance in the quarter. “Higher utilization and volume upsides should drive solid margin defence, neutralizing any pricing and currency headwinds," they wrote, rating the Infosys stock as “buy".

But not everyone is so optimistic. Analysts Mitali Ghosh, Pratish Krishnan and Kunal Tayal of Bank of America Merrill Lynch said they diverge from the consensus, expecting slower revenue growth as the IT market is likely grow at less than 15% in the next decade, down from 30% growth in the last one.

“Structurally, we expect slower revenue growth going ahead on slower expansion of addressable market and greater competitive intensity," they wrote in a 26 September report. The analysts have rated the IT stocks at “underperform", saying “we believe the market will be disappointed in the near term on margins and in the longer term on revenue growth trajectory".

Analysts Kawaljeet Saluja and Rohit Chordia of Kotak Institutional Equities Ltd, said they expect the bigger vendors to report a strong quarterly performance.

“We attribute the likely outperformance to release of IT budgets after delays in finalization, uptick in demand from the financial services vertical and gains from vendor consolidation, and favourable cross-currency movements that will likely help revenue growth by 1-2% points," Saluja and Chordia said in a 1 October report.

Analysts Harmendra Gandhi and Pinku Pappan of Nomura Financial Advisory and Securities (India) Pvt. Ltd said the number of deals and deal closures has increased over the last six months.

“We believe vendor consolidation and business efficiency-related IT spending by customers are likely to result in sustained volume growth recovery for vendors," they wrote in a report on 10 September.

Analysts Surendra Goyal and Vishal Agarwal of Citigroup Global Markets India Pvt. Ltd said that the focus would be on management commentary given the sharp rally in stocks which already prices in a fair amount of growth.

According to a Mint poll of 11 brokerages—Citigroup, CLSA, Kotak, Bank of America Merrill Lynch, Motilal Oswal Securities Ltd, Sharekhan Ltd, Infinity.Com Financial Securities Ltd, KR Choksey Shares and Securities Pvt. Ltd, Morgan Stanley Asia Ltd, IDFC SSKI Securities Ltd and Angel Broking Ltd—Infosys’ revenue for the September quarter is expected to grow 3.1% on average over the preceding three months to Rs5,629 crore. Net profit is likely to grow 1% to Rs1,524 crore. In April, Infosys had forecast its Q2 revenue at Rs5,318-5,413 crore.

Wipro, India’s third largest software exporter, is likely to report a 3.5% increase in profit to Rs1,054 crore on account of gains in foreign exchange and growth in revenue, including consumer products, of 3.9% to Rs6,605 crore. TCS is expected to see its profit drop 1.21% to Rs1,500 crore, while revenue may grow 1.9% to Rs7,348 crore.

Graphics by Ahmed Raza Khan / Mint