NEW DELHI: Profits in the IT sector may take a hit during the first quarter of financial year 2019-20, with factors like wage hikes, high attrition and visa costs set to weigh on earnings margins. While the top three companies — Tata Consultancy Services, Infosys and HCL Technologies — is likely to report a revenue growth of an estimated 2.8-2.9 per cent quarter-on-quarter in constant currency terms, analysts expect Wipro and Tech Mahindra to post flattish revenue growth.
“We anticipate cross-currency headwinds of 20–25 bps for the top-five Indian IT players in light of a resurgent USD (up 1.1 per cent versus GBP and EUR for Q1 FY20),” said brokerage firm Edelweiss. Higher costs of sub-contracting, wage hikes and persistently high attrition are likely to impair margins, it said.
EBITDA margin of Infosys is likely to dip 60 bps while TCS’s EBITDA margin is likely to be down 50 bps on quarter impacted by rupee appreciation and wage hikes. “Wipro is also set to deliver no constant currency growth for Q1 FY20, while cross-currency headwinds imply 22 bps revenue dip. Adjusted EBITDA margin is expected to dip 90bps owing to wage hikes and a strong INR,” Edelweiss noted. HCL’s growth forecast has also been trimmed because the company will not be realising close to $50 million revenue pertaining to the acquired IBM intellectual properties, which was expected to be on its books by Q1 FY20. “We estimate EBITDA margin to decline 130bps QoQ mainly as HCL invests in preparation for the IBM IPs,” it noted.
However, the good news is that demand across the board remains robust and this should reflect in strong deal wins which in turn will partially nullify the impact on margins. “We expect digital to continue to grow at break-neck speed underpinned by higher adoption by enterprises, leading to larger deal size for digital services,” pointed out Edelweiss.