Wednesday, April 25, 2018

IT services to expect steady third-quarter in current fiscal

Edelweiss securities expect positive Q3 earnings for top IT players on the back of stable global currency

  • IT services to expect steady third-quarter in current fiscal

By Himali Patel

Edelweiss securities in its report on result preview for Q3 FY18 IT earnings estimates top-5 IT players like Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies (HCLT) and Tech Mahindra (TECHM)  are likely to witness 0.7 per cent - 2.7 per cent Q-o-Q USD revenue growth. Additionally, companies like HCLT and TECHM to stand out with 2.7 per cent and 1.7 per cent Q-o-Q USD revenue growth, respectively. However IT companies like Infosys, Wipro and TCS are estimated to grow at a slower pace of 1.4 per cent, 1.4 per cent and 0.7 per cent, respectively.

 

Stable global currencies: The report highlights that during Q3 FY18, the major global currencies were fairly stable, and it wouldn’t materially affect revenue growth or margins.

The other positive triggers include manufacturing activities which will spearhead growth amongst verticals but due to slower than anticipated decision making in BFSI and adverse impact of brick-and-mortar model in retail, this segment does not paint a convincing picture.

On the flip side, to fuel the growth strategy Edelweiss notes that BFSI to be incrementally positive on the back of US corporate profits, rising interest rates and increasing profitability. However, pain in retail sector may endure for some more quarters. Buoyed by the positives changes amongst geographies, Europe is expected to outpace US.

 

Currency front: For the IT sector their earnings are usually benefited when rupee depreciates, as it gives a revenue booster for IT exporters. Analyst at Edelweiss highlight that, though INR has appreciated 2.2 per cent Q-o-Q against USD, the quarterly average rate has marginally depreciated by 0.7 per cent. Accordingly, Edelweiss securities do not foresee any significant impact of currency on margins or any cost pressures in existing or new deals.

 

Improving Outlook:

Going forward, the Edelweiss securities has been enthusiastically following 5 parameters to monitor the growth of the IT sectors. These are 1) Infosys’ strategic roadmap post appointment of new CEO, Mr. Salil Parekh; 2) demand in BFSI & Retail 3) clients’ budget & pricing and deal pipeline in legacy businesses; 4) traction in digital services; and 5) pace of local hiring in US.

 

Further sustained increase in number and scale of digital transformation deals along with a positive bias towards large-cap companies for execution of large deals is also helping these IT companies to ensure robust digital growth rates. The brokerage house has given ‘BUY’ recommendation on HCLT & TECHM and ‘HOLD’ on Infosys, Wipro & TCS.