Dollar revenue earnings of IT firms may take a hit amid currency depreciation

Cross currency pressures, coupled with the usual delays in project ramp-up at the beginning of the calendar year, may tell on the fourth quarter earnings of frontline IT firms.

Though the likes of Tata Consultancy Services, Infosys, Wipro and Tech Mahindra are expected to register year-on-year profits growth of 4-8 per cent, their dollar revenue earnings is estimated to be impacted by 200-250 basis points.

In the quarter gone by, major global currencies have depreciated by 4-10 per cent vis-a-vis the dollar. The euro depreciated by 12 per cent against the rupee in the Jan-March period.

“We expect HCL Technologies (HCL Tech) to lead the pack with constant currency (CC) growth of 3.5 per cent quarter on quarter whereas Tech Mahindra would lag with flattish revenues in CC terms on an organic basis,” ICICI Securities said in a research report.

Traditionally, the fourth quarter is a soft one for IT companies as budgets get closed from January to March while decisions are taken between February to March on the quantum of discretionary, operational and capital spending.

“Volume growth in Q4 will be impacted due to lower spending in specific verticals (telecom, insurance), sharp decline in oil prices and slower pick-up in momentum,” Ankita Somani, Sector Analyst with MSFL Research, said.

All eyes will be on the management commentary of the top IT firms, especially regarding overseas demand trends and the opportunities around digital transformation.

“We expect management commentary to be cautious given the uncertain macro environment in developed markets, and volatility in commodity and currency markets,” as per a report from IDFC Institutional Securities.

The central theme driving demand for Indian IT over the past 2-3 years were ‘cost take-out’ projects.

“While Indian IT has done well, this business is under pressure. For sustenance of growth rates, it is essential for Indian IT to meaningfully participate and scale up its digital business. We would watch out for more details on digital strategy of Indian IT companies,” Kotak Institutional Equities said in a research report.

For the first time, Infosys will report its Q4 numbers after bellwether TCS, whose results will be unveiled on April 16.