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Frontline IT companies may report a 14-26 per cent rise in year-on-year revenue even as they brace for thinner margins in the first quarter ended June 30.
A strong rupee, coupled with higher employee expenses and visa costs may result in sequential margin decline of between 110 and 210 basis points for the top three Indian IT firms, say brokerages. The rupee has appreciated by over 2.5 per cent during the April-June quarter.
“We expect the first quarter of fiscal 2015 to set the tone for a better financial year compared to fiscal 2014, riding on a seasonally strong quarter and improved prospects from the US even as Europe remains the growth driver,” Sandip Agarwal and Omkar Hadkar, analysts with Edelweiss Securities, said in a research note.
In a report dated June 30, Religare Institutional Research said: “Tata Consultancy Services and HCL Technologies are likely to be in the top quartile, while Wipro’s growth is expected to lag its peers.” The Indian IT industry had recorded modest revenue growth in Q4 because of fewer working days, broad-based furloughs (a furlough is a temporary leave of some employees due to special needs of a company) across industries and lower project-based spending by clients in key market such as North America. On the other hand, Q1 is a seasonally strong quarter as clients are ready with a fresh budget for the year.
On the flip side, Q1 is when most IT companies dish out wage hikes to employees across locations. Moreover, Indian IT companies generate the lion’s share of their revenue from software exports to the US and, hence, strengthening of the rupee has a negative impact on margins. Thus, operating margins for TCS and Infosys are expected to decline by 180 basis points and 210 basis points respectively, while Wipro may log a decline of 110 basis points.
Most brokerages expect fiscal 2015 to be a ‘normal’ year in terms of margins, with decline being restricted to only the first quarter. “We retain our positive stance on Indian IT and expect a strong fiscal 2015 in terms of revenue growth. Pick up in discretionary spending as evidenced by Accenture’s results and market share gains in Europe are encouraging signs,” Kotak Institutional Equities said in a note. Ireland-headquartered Accenture recently reported a 7 per cent increase in revenue to $7.7 billion for the April-June quarter.
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