The last quarter, that is Q2 of the fiscal, was a tough period for most IT industry players as they experienced a sharp decline in employee addition and client acquisition. Margins could be slightly better for Infosys, Wipro and Tech Mahindra, but they had to delay wage hike and let go of people during the quarter.

The long-term growth rate for the sector as a whole should settle in the mid-teens from a percentage point perspective. Even this is an aggressive number, given the amount of change that the industry is going through. While revenue growth will be in the mid-teen levels, EBITDA earnings should settle in the low double digits, said Siddharth Pai, an independent technology consultant based in Bangalore.

This time around, more than the usual quarterly numbers and revenue performance figures, the markets and share holders will be watching out for certain critical factors from Infosys on the day of their quarterly announcement on October 24.

Fresh statements on the company's focus on investors, update on its month-long CEO hunt, its direction in the digital arena, new strategy (as promised by its non executive chairman Nandan Nilekani) and the progress it made so far on the automation front are expected during the forthcoming quarterly announcement.

The overall outlook for the industry remains positive though muted across key geographies and verticals. There is a lot of demand for services around Next Gen technologies such as AI (artificial intelligence), neural networks and contextual analytics which will drive demand over the next few years, said Hansa Iyengar, senior analyst at Ovum, a London-based analyst firm.

From a company perspective, Infosys results are much awaited for the new management’s take on revision in guidance, hunt for a new CEO, update on strategy and also whether the Panaya investigation reports would be made public, said Girish Pai, Head of Equity Research, Nirmal Bang Institutional Equities.

Common thread

Going forward, increased focus on digital landscape and strategies to explore emerging areas could be the common thread shared between all lead tech players in the country as they all see a lot of pressure from their customers to increase the share of automation.

Infosys’ commitment to the strategic direction of ‘people + software’ would be closely watched, especially if it wants to continue with ownership/creation of key products and IP, or if it will be content adopting the partnership route instead, said a revenue forecast issued by Kotak Institutional Equities.

ICICI expects CC (constant currency) revenue growth of 2.5 per cent QoQ vs 2.7 per cent QoQ delivered by the company in Q1FY18. However, details on the probable loss of market share in the discretionary wallets of clients and attrition amongst high performers will become evident only over the course of the next few quarters, which would make rerating difficult in the near term irrespective of execution on near-term numbers,’’ said Kuldeep Kaul of ICICI Securities.

Challenges

According to Kotak, TCS would post constant currency (CC) revenue growth of 2.1 per cent and cross-currency tailwind of 130 bps. Growth would be weaker than usual and impacted by soft BFS (business and financial services) in North America and industry-wide challenges in the retail vertical. Expect EBIT margin to recover 125 bps on normalisation of wage hike, cross currency tailwinds and operational efficiency.

“At a broader level, we expect investor focus on BFS demand outlook, TCS’ positioning in the evolving digital landscape, growth outlook for digital practice and progress on large digital integration deals and margin outlook,” said Kotak.

Kotak also expects CC revenue growth of 1.2 per cent for Wipro, partly aided by IP deal (20 bps), close to the upper end of revenue guidance of 0.5 per cent to +1.5 per cent.

“We expect a cross currency tailwind of 160 bps. Growth would be aided by large deal ramp-ups in the BFS vertical. We expect 40 bps improvement in the EBIT margin driven by operating efficiencies and cross currency tailwinds, partly offset by a full quarter impact of wage revision. Wipro expects to converge with industry growth on sequential basis from 4QFY18,” said Kawaljeet Saluja of Kotak.

From Wipro, the markets also expect investor focus on positioning in digital and progress in large digital deals, growth from top 10 accounts and increase in $50m/ $100m+ clients and integration progress on various acquisitions

For HCLT, Kotak predicts a CC revenue growth rate of 2.8 per cent (2.1 per cent organic) and cross currency tailwind of 150 bps.

“We expect HCLT to retain CC revenue growth guidance of 10.5-12.5 per cent. In addition, expect the company to retain 19.5-20.5 per cent EBIT margin guidance. Key areas of investor focus are progress on deal closures in IMS, deal closures in ERD, an area which has witnessed slowdown, how the company intends to catch up with competition in digital, and M&A strategy in the light of multiple acquisitions announced by the company,” said Saluja.

According to ICICI Securities, overall there is sluggishness in the Retail and Banking & Financial Services (BFS) verticals in the US across the top-3 industry participants and company-specific challenges – healthcare for Wipro, IMS deferrals for HCL Tech – are likely to ensure that Q2FY18 is another lacklustre quarter for the Indian IT industry. CC growth in revenues on an organic basis is expected to range between 0.5 per cent QoQ for Wipro to 2.5 per cent for Infosys and TCS, with HCL Tech and Tech Mahindra (TechM) to be somewhere midway at around 1.5 per cent QoQ. However, cross-currency tailwind of nearly 100bps on an average across players should ensure that the growth in US dollar revenues for the top-5 IT service providers in aggregate is reasonable at 3.1 per cent QoQ and 8.1 per cent YoY.

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