IT majors may see margin pressure in Q4: Analysts

Analysts see margin pressure for information technology companies for the last quarter of previous fiscal despite the depreciation of rupee. IT majors are scheduled to announce the Q4 and full-year financial performance of 2010-11 from next week. IT major Infosys will declare its financial performance on April 15.

“Margin should see tailwinds from both positive cross-currency (0.4-0.9 per cent revenue uplift) and Indian rupee depreciation (0.9 per cent Q-o-Q). But, a likely flattish utilisation and higher sales, general and administration (SG&A) expenses could cap the upside. We see 2.9 per cent PAT growth for Top 4 players,” said StanChart's Mr Pankaj Kapoor and Mr Apoorva Oza.

According to a Citi report, “We expect margins to be largely flattish for Tier-Is barring company-specific issues. Rupee depreciation/ cross currency should, however, help investments in businesses in anticipation of growth. In addition, we see company-specific issues such as continued losses in BPO (HCLT), and one-offs last quarter (TCS).

Robust numbers likely

However, analysts are expecting robust top lines from IT majors.

“We expect the top-6 IT companies in our coverage universe to report 4.7 per cent Q-o-Q rise in revenue (3-5 per cent in US dollars), with net profit up 1.7 per cent. Margins are likely to be flattish sequentially, with the top-six likely to report a 18 basis points slide. In the March-ending quarter, the average INR/USD conversion rate was 45.3 vs. 44.8 for the December-ending quarter. Tech Mahindra would benefit the most owing to its greater billing in pounds and euros,” says Anand Rathi report.

According to Mr Sandip Agarwal of Antique, “We believe that 4Q-FY-11 will be a strong quarter for top IT companies due to uptick in discretionary spends. Contribution from the consultancy business will increase from the current quarter for both Infosys and TCS and will have a positive impact on the margins of the company.”

According to Emkay Global, “We expect a 3.8-4.7 per cent Q-o-Q $ revenue growth for our Tier-I IT coverage universe with TCS and HCL Tech leading peers on revenue growth. Amongst the Tier-II companies we expect about 2.6-6.7 per cent sequential $ revenue growth with Infinite Solutions leading the mid tier pack.”

Volume-led revenue

“We expect primarily a volume-led revenue growth for the sector with marginal cross currency and price gains. While we expect margins to remain flat sequentially for Infosys, margins could dip by about 30 bps Q-o-Q for TCS on account of normalisation of bad debt provisioning. We expect Wipro to report about 40 bps improvement in margins sequentially driven by higher utilisation benefits, the Emkay report added.

However, the Citi report said: “While the business outlook remains strong, outperformance (vs. Indian market) prices in most positives, in our view. Also, supply-side challenges could limit EPS upside even if revenues come in ahead of expectations. The sector remains defensive in tough markets — driving our neutral view.”

“While we maintain our optimistic view on the medium- to long-term prospects of the sector, the recent run-up in stock prices and a potentially stronger rupee may limit upsides in the near term. Over the medium term, we expect large caps to out-perform as they are better equipped to counter the impact of appreciating rupee and capitalise on the strong demand scenario. Infosys and TCS remain our preferred large-cap picks. In mid-caps, we prefer NIIT Technologies and KPIT Cummins,” said Mr Dipen Shah of Kotak Securities.

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