Mild revenue growth ahead for IT industry

The March ending quarter is usually a weak quarter for the Indian software industry, as it is a period for clients to rework their IT budgets. Customer requirements are drastically changing and on the top of it the industry has been facing frequent anti-outsourcing rhetoric and visa clampdowns in key customer markets.

After factoring in these elements, analysts expect a mild revenue acceleration during the fourth quarter ended March 31. Independent tech analyst, Anup Chandran said, “Single digit growth is already the order of the day. Q4 won’t spring up any surprises for markets or media, it is going to a sober or may be a slightly better quarter than the previous one.”

As usual, Infosys will open the earnings quarter – this time on April 13 – and market watchers said the company is expected to post a 1.4 per cent revenue growth, as against 1 per cent a quarter ago. The country’s leading tech player, TCS, and the third largest player, Wipro, are expected to post a 1.1 per cent growth over their previous quarters. HCL Technologies may bring in a commendable 2.2 per cent growth, while Tech Mahindra will post a 1.5 per cent revenue growth, they added.

According to Reliance Securities analysis, IT firms are set to post a combined 3.1 per cent QoQ rise in dollar revenues in 4QFY18. The firm expects the top five IT firms to post 1.9 to 3.5 per cent QoQ, dollar terms growth with Tech Mahindra leading the pack. Mid-sized firms would see huge variations, with Cyient and Mindtree likely bringing in 8.2 per cent and 4.1 per cent QoQ (dollar terms) growth respectively.

A 100-120 basis points cross-currency tailwind would boost large companies as major global currencies, Euro, GBP, Euro and Australian dollar, appreciated against the US dollar during Q4. The Indian rupee too saw a bit of appreciation of 0.6 per cent QoQ against the US dollar.


 Cross-currency movements

“Cross-currency movements were positive across the fiscal that went by and this can bring in comfortable margins for most IT players,” adds Kochi-based tech analyst Chandran.

“On the margin front, we expect a positive trend almost across-the-board, as favourable currency movements, operational efficiency and automation benefits drive profitability higher. Among top-tier IT firms, we expect Wipro to post 286bps QoQ rise, Tech Mahindra to post 95bps QoQ margin expansion, followed by HCL Technologies 76bps, Infosys 74bps and TCS 54bps,” said Reliance Securities.

A JM Financial Ltd analysis further said, “Empirical evidence suggests turnarounds in the Indian IT sector are sharp and difficult to time. Thus, we are optimistic of 4QFY18 results sustaining the trajectory of growth recovery evident from 3QFY18 results.”

Almost confirming the digital trend, R Ray Wang, principal analyst, founder, and chairman of Silicon Valley based Constellation Research Inc, said, “We see some great case studies where Indian IT players have helped clients transform business models. They start with an IOT project, Big Data, AI, or even blockchain.”

However, Wang refused to call the Q4 a turnaround quarter, adding, “Next year is a big year for Indian IT. No good breakouts visible this year, though BFSI has done sort of good, retail showing signs of turnaround while telecom is really flat.”

The spotlight of the season will continue to be on Infosys. The company’s new CEO Salil Parekh had promised, at the time of his joining in January, that he would unveil a strategic roadmap in April. Infosys’ investors would be keen on its growth outlook for FY19 – none of its peers give out guidance – and the company’s commentary on demand environment.