Organic growth is estimated at 2.4% sequentially for top four IT firms, almost same as growth in Q1
Growth at TCS is likely to fall to single digits, after four straight quarters of double-digit growth
The July-September quarter has historically been the strongest one for Indian IT services companies. But in this fiscal year, there is unlikely to be any show of strength when companies announce second quarter (Q2) results.
“Organic growth is estimated at 2.4% sequentially for the top four IT firms— TCS, Infosys, HCL Technologies and Wipro—in the September quarter, barely higher than the 2.3% growth reported in each of the preceding two quarters," says an IT sector analyst at a domestic institutional firm, who declined to be named.
What’s more, year-on-year revenue growth at industry leader Tata Consultancy Services Ltd (TCS) is expected to fall to single-digit levels, after four consecutive quarters of double-digit growth.
“We see risks to double-digit growth guidance at TCS," analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a results preview note to clients. Analysts expect the company to report 9-9.5% growth, down from 10.6% in Q1. While TCS doesn’t give guidance, its management had earlier sounded confident of achieving double-digit growth in FY20.
If the company’s growth falls to single-digit levels in what is meant to be the strongest quarter in the year, it’s fair to conclude that investors would need to settle for lower-than-anticipated growth for the whole year.
Indian IT companies have been sounding cautious about tech spending in the banking and financial services (BFS) vertical, pointing to weakness in areas such as capital markets, European banks and some US regional banks that are going through mergers and acquisitions.
This was attested to when Accenture Plc. reported results for the quarter ended August late last month. Revenues from its financial services vertical grew 4%, far lower than the 7.2% company-wide growth. This was mainly owing to a continued decline in revenues from European banks.
Since the BFS vertical is a mainstay for most Indian IT services firms, it isn’t surprising that overall growth rates are under pressure. “We believe that IT spending will moderate in financial services in 2019 after a strong year in 2018. IT services companies face pressure from higher squeeze on run spends (i.e. traditional services), while spending in new areas remains steady," analysts at Kotak Institutional Equities said in a note to clients last month.
While revenue growth is coming under pressure, profit margins, too, have been falling. Increasing protectionism has resulted in a higher cost structure in these companies’ US on-site operations.
To be sure, the impact of these headwinds will be felt differently across different companies. In TCS’s case, a high-base last year will also impact growth. Infosys, on the other hand, had a relatively lower base; besides, it has a set of BFS clients that are reportedly increasing tech spend. It’s little wonder shares of the latter have outperformed TCS by a wide margin in the past three months.