BFSI weakness, delayed spends may weigh on IT firms’ Q2 numbers

Venkatesh Ganesh Bengaluru | Updated on January 16, 2018

The industry is ascertaining the extent of weakness in TCS’s banking and financial services vertical and whether it can maintain margins

Tech shift, Brexit uncertainty will also impact earnings

The Indian IT sector is staring at a year of single-digit annual revenue growth as companies grapple with technology shifts while their clients face macroeconomic uncertainty from events such as Brexit, which has impacted the financial services sector.

With TCS set to kick off the July-September quarter results on October 13, the industry is keenly watching the extent of weakness in the banking and financial services vertical and whether it can maintain its margins. In the previous quarter (ended June), TCS beat expectations of analysts in terms of margins. However, it recently sounded a cautionary note, particularly on the BFSI vertical in the US, and on holding back discretionary spending.

“We believe the pull-back in discretionary spending will weigh on margins, derailing the company at least for FY17 from its targeted margin band of 26-28 per cent, according to Ashish Chopra, analyst at Motilal Oswal. Currently, TCS’s margin stands at 25.1 per cent.

Similarly, analysts are hoping that Infosys, which will report its quarterly numbers the next day, does not further revise its guidance downwards. Already, India’s second-largest exporter cut revenue guidance to 10.5-12 per cent from the earlier 11.5-13.5 per cent. This is similar to the Nasscom guidance of 10-12 per cent.

This, coupled with the fact that in August, Royal Bank of Scotland (RBS) cancelled a project, could have wider ramifications as clients decide to pull back tech spending due to business uncertainties.

“Specifically with regard to the banking sector in the UK, there is now a clamour by businesses for greater transparency in Brexit negotiations and support for the banking sector, where the pan-European implications of Brexit are significant. As a result, any form of deal making by larger businesses is generally on hold,” said Sanjoy Sen, Doctoral Research Scholar, Aston Business School, UK.

RBS a one-off case?

Infosys CEO Vishal Sikka has himself hinted at some concerns from the impact of Brexit in the next quarter, but added that its second quarter revenues will be better than the first. “We are seeing softness in some clients post-Brexit, which was not anticipated at the start of Q2. We want to see if RBS is a one-off case or there are more,” he told analysts.

A likely slowdown to single-digit growth in FY2017 will be due to lack of participation of Indian IT in early-stage consulting-led digital opportunities and reapportioning of spending away from traditional services, said a report by Kotak Institutional Equities.

The report added that, on the other hand, this also presents a significant opportunity.

These developments are coming at a time when global tech spending has been described as ‘lacklustre’ by research firms such as Gartner.

However, the improvement that Sikka talks about has come about by arresting the slide in its consulting and India business; the former was responsible for dragging the company’s revenues down after six quarters of strong performance.

Published on October 03, 2016

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