The first quarter results for the IT sector are expected to see companies post better revenues, given a stronger dollar, but margins are expected to be weaker due to wage hikes and the impact of Brexit. The quarter is expected to be good for TCS, as the company is expected to see bottoming out of slow growing businesses like Diligenta in the UK and overall business in Japan.

The largest IT services firm will announce its first quarter results on July 14, and is expected to show 3.5-4.0 per cent sequential growth.

“Traditionally, Q1 has been a seasonally strong quarter for Infosys and TCS. Although we view ‘Brexit’ as a headwind for near-term discretionary spending, Q1 FY2017 was largely unaffected by it,” said India Infoline’s Sandeep Muthangi. The country’s second-largest software exporter, Infosys, will be leading in terms of growth for IT services firms, with 4.0-4.5 per cent sequential revenue growth in constant currency terms. Wipro, on the other hand, could report flat revenue growth with slowdown in BFSI (Banking, Financial services and Insurance) and energy verticals. Moreover, the acquisition of HPS and salary hikes is likely to weigh on the company’s margins.

Margins will be impacted on various counts for each of the top four IT firms. “Margins for Infosys and TCS will get impacted on account of visa costs and the full-quarter impact of wage hikes.

“For Wipro though, wage hikes go into effect from June, and gratuity expenses get revised upwards for the entire quarter. Integration of the Health Plan acquisition will be margin-dilutive by 40 bps as well,” said Kuldeep Koul, Research Analyst at ICICI Securities.

HCL Tech, on the other hand, is expected to see an impact on margins due to acquisition of Volvo’s external IT business. The Noida-based IT firm is also expected to see negative impact from slowdown in the BFSI segment. “Organic revenue growth for HCL Tech (including the Volvo internal IT deal) should be in the 2.5-3.5 per cent range, with Volvo external IT expected to contribute nearly 2.5 per cent,” said Koul.

Views on Brexit

While commentary on Brexit would be something to look out for, the effect of Britain’s exit from the EU is only expected to show its impact from the next quarter.

“The single largest doubt for UK-based banks is their ability to borrow and service debt amidst the onset of a potential GBP crisis, in addition to concerns over the UK economy and impact on employment. Watch out for commentary by top-tier peers on the same,” said Ashish Chopra, Research Analyst at Motilal Oswal.

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