The IT sector’s first quarter results are expected to reflect the full impact of the coronavirus pandemic on companies. Analysts expect firms to report 4-8% decline in revenue, depending on exposures to troubled sectors such as retail, aviation and hospitality. They will be watching for pricing pressure, outsourcing revenue of banking, financial services and insurance (BFSI), pharma and healthcare performance for signs of distress.
Tier I companies like TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra are expected to post 4-6% sequential dollar revenue decline, while tier II firms may report 4.5-8.1% fall in the June quarter. Ebit margins will fall sequentially, but the impact may be limited by currency depreciation and tight costs controls, said a report by Emkay. Ebit stands for earnings before interest and taxes.
“We are largely expecting Q1 to be the rock bottom. Almost 75% of the IT clients have remained stable across sectors like BFSI, utilities, healthcare and communications. These areas are likely to witness a 3.5 to 4% revenue decline. The remaining 25% of IT revenues across retail, transport, hospitality and aerospace will experience revenue decline in the range of 10-15%," said Amit Chandra, IT sector analyst, HDFC Securities.
Retailers that TCS or HCL have exposure to were lesser impacted than those that Wipro has been exposed to. Across sectors, the nature of investments or projects will define the impact. Midcaps with exposure to engineering research and development and manufacturing, such as Larsen and Toubro Technology Services, Sonata Software and Tata Elxsi, are likely to report more challenges due to the on-site nature of their work. What is important is for companies to guide whether the impact ends in Q1 or continues further, said Chandra.
Analysts will also expect new Wipro CEO Thierry Delaporte to announce his strategy for the IT major. According to most brokerages, Larsen and Toubro Infotech is expected to report the best numbers and deal wins among midcaps.
The 4-8% revenue decline will be offset by positive gains from cost optimization due to reduced travel costs (by 1.5%), currency appreciation (1%) and absence of salary hikes (1.2%) which is also going to protect margins against a sharper decline.