India’s top software exporters, TCS and Infosys, report March quarter results today, kicking off the earnings season. Despite March being a seasonally weak quarter for IT companies, Elara Capital expects India IT services firms to report a good quarter of revenue growth. Another brokerage Motilal Oswal also sees IT companies reporting another quarter of “healthy" set of numbers. “There is significant revenue acceleration amid strong momentum in deal activity; however, the rupee appreciation can act as a headwind," Motilal Oswal said in a note. Infosys and TCS shares edged higher today in early trade.

Shares of IT companies have outperformed markets in the past one year, with Nifty IT index rising about 24% as compared to 11% gain for the Nifty50 index. Both TCS and Infosys are set to report earnings after market hours today.

The Indian IT sector has also been in the spotlight in the wake of some big deals in the sector. Baring Asia Private Equity has agreed to acquire the founders’ (promoters + NIIT) stake in NIIT Technologies. L&T bought a fifth of Mindtree from coffee baron VG Siddhartha and companies related to him for 3,269 crore and said it planned to raise its stake to 66%.

Here are 5 things to watch out for in TCS, Infosys results:

Growth guidance: Infosys had in January raised its full-year revenue outlook to 8.5-9% in constant currency terms from the earlier 6-8%. Some analysts expect Infosys to guide for a higher growth in FY20. “We expect revenue growth guidance of at least 9-11% in constant currency terms, given the buoyant demand environment," Elara Capital said in a note.

TCS in the December quarter had posted a fourth straight quarter of year-on-year double-digit revenue growth in constant currency terms. Analysts say that TCS’ impressive deal wins over the past few quarters should help it maintain growth in the next fiscal.

Margins: The margin prospects of IT companies assume critical importance in the light of major cost headwinds in the form of wage inflation owing to talent shortage, say analysts. “Levers for margin defence are steadily eroding, with utilisation at reasonably high levels, rupee tailwind receding and investments in the business likely to remain a constant need to scale-up digital growth," Reliance Securities said in a note. “We would watch the margin picture in FY20, and believe growth, increasing automation and higher digital pricing owing to high demand are the key levers for margin defence."

In the December quarter, Infosys profitability took a hit while Mumbai-based TCS too saw a contraction in operating margin. Infosys had reported an operating margin of 22.6% in the October-December quarter, 110 basis points narrower than the 23.7% in the July-September period. The operating margin of TCS had also narrowed by 90 basis points to 25.6% in October-December quarter from 26.5% in the July-September period, hurt by cross-currency movement and higher employee costs.

Elara Capital expects Infosys to guide for an EBIT margin guidance of 21-23% for FY20.

Management commentary: The commentary from top bosses from TCS and Infosys will be closely watched to gauge the demand scenario for IT services as global slowdown worries take centre stage. However, some analysts believe that the IT sector is poised for a multi-year spending uptick as it is in the middle of a major technology refresh cycle. “Despite macro headwinds, we expect commentary across most firms to be positive. The US economy continues to do well," analysts at Elara Capital said in a recent note.

Share buybacks: Return of cash to shareholders is a theme that continues to play out with many Indian IT services companies resorting to share buy-backs to make better usage of their cash balances. Bengaluru-based Wipro this week said that that its board will discuss buyback proposal on its meeting scheduled on April 16. A buyback can be done only once in 12 months. Infosys had earlier in January this year approved a 8,260 crore share buyback, the second successive repurchase in as many years. In June last year, TCS had approved a 16,000 crore share buyback.

BFSI vertical: IT companies could see a slower growth from the banking vertical for the industry in FY2020, says Kotak Institutional Equities. “Overall we expect broadly similar industry growth for IT services in FY2020 with growth to be front-ended," it added.

“The stock returns for IT companies can be muted from here after a strong performance in the past 12 months," says the brokerage.

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