IT companies may post muted Q4 earnings

Venkatesh Ganesh Mumbai | Updated on April 14, 2020

Industry watchers believe that uncertainty will prevail over the next six-nine months   -

Pandemic to hit revenues, margins of firms

The last quarter for most software services companies in India tends to be muted, but in the backdrop of the Covid-19 pandemic, software services providers face a double-whammy. Covid-19 has disrupted business plans of companies worldwide, especially for those in developed markets that outsource their technology requirements to Indian companies.

As TCS will be reporting its Q4 results on April 16, analysts told BusinessLine that the company is expected to post a de-growth in revenues in the 0.6-0.9 per cent range on a sequential basis (in constant currency terms). In dollar terms, TCS is expected to post revenues of $5,554 million compared to $5,586 million in Q3.

Guidance bands to widen

“We are building a margin decline of 40 basis points (0.4 per cent) on a sequential basis, even as a weakening rupee against the dollar cushions some of the impact,” according to Sandip Agarwal of Edelweiss Research. TCS margins are expected to come in at 26.9 per cent.

The reduction in margins is critical for IT companies that are struggling to consistently increase their margins.

The script for Infosys which is expected to follow TCS results appears to be on similar ground — revenue decline on a sequential basis and flat margins. Infosys is expected to post 0.5 per cent decline in Q4. In dollar terms, Infosys is expected to post $3,230 million compared to $3,243 million in Q3. EBITDA margins for Infosys are expected to be 25 per cent compared to 25.1 per cent in Q3, according to analysts. As per Motilal Oswal analysts, even if they (companies) were to guide, these guidance bands will likely be wider than usual and subject to sharp revisions later on, as clients relook at their IT budgets.

Recovery to be gradual

As the market keeps an eye on the numbers, it will also want to get a sense of how tech deals across different sectors are shaping up.

ISG forecasts sharp contraction in annual contract value in Q3 due to supply and demand challenges in the wake of the Covid-19 pandemic. Recovery is likely to be gradual and over the first half of FY21. ISG pointed out that travel will be the most affected vertical followed by retail.

It is interesting to note that BFSI, from which larger companies get 30 per cent of their revenues, saw a 3 per cent deceleration in Q3.

“We will keep tabs on management commentaries pertaining to how severe the demand hit is, especially in BFSI and retail, while outlook on hi-tech, communication and telecom will also be crucial,” said Agarwal.

However, the shutdown in the economy is unprecedented, industry watchers believe that uncertainty will prevail over the next six-nine months.

Meanwhile, on the ground, IT companies have begun to take measures such as ‘work from home’ option for some of its employees, in an effort to ensure business continuity. However, not all services can be delivered from home as it requires IT systems with higher security, privacy controls and client permissions. This results in lower productivity and, in turn, impacts employee utilisation, Motilal Oswal analysts said.

Published on April 14, 2020

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