HYDERABAD: Indian IT companies are showing disparate signs of growth as the sector may turn in muted performance for the just-concluded June quarter, but with two outliers - TCS and Infosys, which were expected to clock double-digit growth. While, two large players, HCL Technologies and Tech Mahindra, may report weak-to-moderate growth, some of the midtier companies may even see a deceleration in growth rates. This is a departure from the usual trend, where the performance of large companies is considered a marker of where the industry is heading.
The top four include TCS, Infosys, HCL Technologies and Tech Mahindra, as Infosys’ crosstown rival Wipro bowed out of the race, having indicated weak first-quarter revenue forecast back in March 2019. While the country’s largest software services exporter TCS reported a healthy 11 per cent growth in Q1 profits, Infosys too is likely to follow suit on Friday, perhaps powered by large deals.
While revenue and profit growth estimates vary across firms, Earnings Before Interest and Taxes (EBIT) margins will likely to decline across companies (barring Wipro) over the last year, according to brokerage Kotak Institutional Equities Research. “Reasons for the decline may vary across companies, though broad factors include localisation and increase in cost structure in the US, investments in digital and large deal-transition costs. Expect moderation in earnings assumptions ahead.
TCS will shine with its relatively stronger performance, while Tech Mahindra will disappoint,” noted Kawaljeet Saluja of Kotak. Brokerages also hint that profitability will remain a key concern, with 20-340 bps decline in EBIT margins within the top deck. Why? Higher visa applications, resulting in a shortage of overseas local talent and increased talent cost structures. Besides, companies are also investing heavily in digital business (both organic and inorganic growth), again leading to higher costs.
“Some impact on margins is transient such as rupee depreciation and acceleration in revenue growth providing a cushion for margins in FY19. Rupee depreciation is critical to defending margins, else there are downside risks to profitability in FY20,” Saluja observed.
However, the guidance of companies are likely to stay unchanged. While Infosys and HCL Technologies provided FY20 revenue growth guidance of 7.5-9.5 per cent and 14-16 per cent respectively, and subsequently lowered EBIT margin guidance by 100 bps each, they may retain overall guidance. Tech Mahindra’s 6-8 per cent revenue growth expectation could move to the lower end of the band.