The fourth quarter is expected to be a muted quarter for the IT sector, both for the large- and mid-cap companies, due to the overall weakness in the industry.
“The market conditions are precarious due to the economic and political turmoil globally, with no new orders coming in. The fluctuations in rupee will also add to the woes,” Jagannadham Thunuguntla, equity head at brokerage firm SMC Capitals, said.
LARGE CAPS
IT companies will kick off their fourth-quarter earnings with Infosys, the country’s second largest software exporter, on April 12. The Bangalore-based company is expected to post a 2.5 per cent growth, lower than rival Tata Consultancy Services, analysts said.
This is primarily due to clients negotiating lower rates for outsourcing contracts, compared last year. Secondly, Indian IT companies have to offer wage hikes for offshore employees, provide higher pay for lateral hires and other promotions as companies wind down their fiscal.
Also, this comes in the backdrop of a recent positive run up to IT stocks after some decent showing in some of the top stocks in large and mid caps.
“We expect a modest fourth quarter for Indian IT with 2-3 per cent in dollar revenue growth for large players. Given the modest growth, we expect margin declines of 40-100 basis points across large companies,’’ according to a Religare analyst.
A basis point is 1/100th of a percentage and is used to measure differences between percentages. According to a StanChart report by analysts Pankaj Kapoor and Abhishek Kumar, revenue growth across top IT stocks will start to contract and margins of companies could come under further pressure.
“We do not expect any surprises regarding Q4. Though this quarter may see some modest improvement in topline, but a flat bottomline with some pressure on the margins front,” said A.K. Prabhakar, Senior Vice-President (Equity Research), Anand Rathi.
The rupee, which depreciated in 2012, has been appreciating this year, which adds to IT companies’ woes, according to Prabhakar.
MIDCAP COMPANIES
According to sector analysts, the quarter would also be muted for mid-cap companies.
“The pressure on mid-caps would be more,” SMC Capitals’ Thunuguntla said.
“There are no forex tailwinds to drive net profits in the fourth quarter, and mid-caps are expected to deliver soft dollar growth (one per cent to 2.5 per cent on a quarter-on-quarter basis),’’ Religare said in a report, adding that margins are also expected to be muted (except Hexaware) on account of weak growth and reinvestments.
Mid-tier players could disappoint on forex losses, margin stress and a modest revenue growth in 4Q13, according a note by Standard Chartered.
FY14 OUTLOOK
Analysts are watching the management commentary for the next fiscal. “We see a balanced stance on FY14 guidance with ‘optimistic’ commentaries,” according to StanChart analysts.
“Infosys’ guidance is likely to be the centre of attention yet again, with the key debate whether it would guide or not,” Religare added.
venkatesh.ganesh@thehindu.co.in
rajesh.kurup@thehindu.co.in