IT companies are expected to see a muted second quarter, with the US economy continuing to be in the grip of a slowdown.
Sluggish outsourcing demand, lesser discretionary spending on technology and delayed decision-making on the outsourcing front would impact both top- and mid-size companies. A weak rupee would also have its impact, analysts said.
“Traditionally, the first two quarters of the financial year are the strong ones for the IT sector.
“This year, we expect a modest second quarter, but it would be better than the first. We see some impact on TCS due to its hiring plans,” Ankita Somani, sector analyst with Angel Broking, said.
volume growth
Earlier in an analysts’ meet, TCS said volume growth was likely to be lower than expected in July-September quarter at 4.5-4.8 per cent (5.3 per cent in first quarter).
It blamed new hires, ramping up of projects and low margins in Asia-Pacific as reasons.
“This delay in decision-making has continued and also, the actual amount of spends as compared to budgets are relatively lower this fiscal,” said Dipen Shah, analyst with Kotak Securities.
There are continued concerns over outsourcing deals. According to A. K. Prabhakar, senior vice-president (Equity Research) at Anand Rathi Financial Services, the order book is not good and this has resulted in a lack of visibility when it comes to the IT business.
Analysts believe outsourcing volumes will go up for the top four IT companies – TCS, Infosys, Wipro and HCL Tech – in the range of 2-4 per cent due to a falling rupee.
The Indian IT sector exports more than 60 per cent of its software to the US and the impact of the rupee’s slide – it fell 2.2 per cent against the US dollar during most part of the quarter — would be felt.
Despite the falling rupee, analysts opine there would be continued pressure on business margins in the second quarter. Some feel that strategies adopted by IT companies in this quarter would marginally help.
Mid-size firms
“We expect Infosys to increase its annual guidance after acquiring the Switzerland-based Lodestone,” Kotak’s Shah said.
The performance of mid-size companies such as MindTree, NIIT and others is expected to be muted, according to analysts.
However, most of them are confident of outperforming Nasscom’s annual growth rates (11-14 per cent), which is not the case amongst the top five companies, barring TCS and HCL Tech.
“Infosys, TCS and HCL Tech will report 3-5 per cent quarter-on-quarter growth on dollar revenue growth … Wipro is expected to lag behind the Tier-I service providers with about 2 per cent,” IDFC Securities Research said in a note. The performance of the tier-II companies would not be different from the tier-I peers, IDFC Securities said.
“The third and fourth quarters of the year are generally weak quarters, due to the holiday season and budget freezes,” Angel’s Somani, said, adding, “outlook by the management of these companies is what I would be watching for…”.