December quarter earnings indicate a decline in net revenue and an increase in net profit
Rupee depreciation against the dollar hurt margins in a seasonally soft quarter
Technology companies have reported a moderate earnings performance in the December quarter amid global uncertainty led by trade wars and slowdown fears. The rupee’s depreciation against the dollar hurt margins in a seasonally soft quarter because of higher-than-usual furloughs. However, tier-I technology companies raised their earnings forecast.
December quarter results announced by nine IT companies so far indicate a decline in net revenue, according to data provided by Capitaline. However, net profit of these companies rose.
The data showed that aggregate net revenue growth slowed to 7.87% in the December quarter from 8.4% in the preceding three months. In the December quarter of the last fiscal, net revenue grew 19.7%. Profit before tax for these companies rose 9.59% in the December quarter from 8.21% in the preceding three months. In the third quarter of last fiscal, it was at 17.2%.
In dollar terms, HCL Technologies outperformed rivals with a net revenue growth of 2.3% from the preceding three months and 15.49% from a year earlier. According to HCL Tech, its strong performance was led by double-digit growth across three segments as its products and platforms grew by 72.8%, IT and business services by 10.4%, and engineering and research and development services rose by 12.8% (year-on-year constant currency basis).
Among the IT majors, Infosys reported the slowest dollar revenue growth at 1.03% quarter-on-quarter but 8.57% year-on-year. Wipro’s dollar revenue growth in Q3 was 1.26% sequentially and 0.18% year-on-year.
Among tier 1 companies, Infosys hiked its FY20 revenue forecast to 10-10.5% from 9-10%. “The continued strength in large deal wins despite a cautious environment and the revenue growth guidance upgrade have meaningful undertones. It indicates business as usual at Infosys despite whistleblower-related distractions. There were neither any negative client repercussions nor has the time taken for large deal sign-offs increased," said an analyst.
Infosys retained Ebit (earnings before interest and tax) margin guidance to 21-23% for FY20. “Ebit margins of Infosys improved by 20 basis points quarter-on-quarter led by 10bps from rupee depreciation and 50bps led by lower on-site and operational efficiencies, offset by lower utilization due to furloughs, which impacted margins by 40 bps," Nomura said in a report on 13 January. Nomura expects Ebit margins of Infosys to stabilize at 22% over FY20-22 with an estimate that it may post 8.1% and 7.3% revenue and earnings per share compound annual growth rate, respectively over FY19-22.
HCL Tech also raised its revenue guidance to 16.5% to 17% from 15-17% and operating margins guidance to 19-19.5% from 18.5% to 19.5%. TCS also said it remains committed to the aspirational Ebit margin guidance band of 26%-28% over the long term.
In a seasonally soft quarter, TCS reported weak growth, dragged by key segments like BFSI and US. “TCS currently trades at a rich multiple of 23 times FY21 EPS. Its industry-leading growth and leadership stability will likely defend the premium multiples in the long term. However, the soft outlook for the near term and rich multiples should limit the upside in the stock," said an analyst.
Indian tech and software services companies are expected to face major headwinds such as weak Europe BFS, challenged clients in retail and some potential impact on demand due to the US presidential election year.