Stock Fundamentals

Prospects to improve in the second half for IT firms

Vivek Ananth | Updated on August 25, 2019 Published on August 25, 2019

Revenue growth to improve, with a pipeline of projects expected to come on stream

The main theme driving revenue growth for the top-tier IT companies in the first quarter of 2019-20 has been the digital business. Digital services and engagement with customers has propelled the revenue growth of almost all top five Indian IT software and services companies. Revenue growth of their core IT service businesses has been flat for most players.

At the aggregate level, the total revenue of Infosys, TCS, Wipro, Tech Mahindra and HCL Technologies together rose 0.4 per cent (sequentially) to ₹99,423 crore in the latest June quarter. Net profit for the pack fell 4.4 per cent to ₹17,602 crore.

Except for HCL Technologies, around one-third of revenues of these companies comes from digital projects. While the projects tend to be of shorter duration, they earn higher margins for the companies. Although digital businesses are seeing robust growth among the top-tier IT companies, only Infosys (1.2 per cent) and HCL Technologies (2.8 per cent) reported decent quarter-on-quarter revenue growth in dollar terms in the June quarter.

TCS (0.4 per cent) had an uncharacteristically muted Q1 in 2019-20 on the revenue front. Wipro (-1.6 per cent) and Tech Mahindra (-2.7 per cent) struggled for buoyancy in revenue because many projects didn’t come on stream during the quarter.

Other than TCS, which saw a marginal 0.1 per cent rise in net profit in the quarter-ended June 2019 (₹8,131 crore), profits for the rest of the pack shrunk sequentially during the quarter. The net profit for TCS, Infosys and HCL Tech was hit by higher staff costs, while all players were impacted by the strengthening rupee.

Decent growth in the US

Business in the US market — mainstay of the top five IT services companies — was good in the June quarter. However, revenues from Europe were either flat or fell.

Revenues are slowing in certain pockets. The larger macro-economic outlook and M&A activity in BFSI in Europe and the US are slowing client spends for Infosys, TCS and HCL Technologies.

On a quarter-on-quarter basis, revenues from Europe were flat for Infosys, while it grew 2 per cent for TCS. For Wipro, HCL Tech and Tech Mahindra, revenues declined sequentially in the June quarter.

 

 

 

Except for Tech Mahindra, which has a very small proportion of revenue coming from the banking and the financial services vertical, revenue growth from BFSI for the rest of the pack was slow in the June quarter. Still, TCS and Infosys notched up 1.6-1.7 per cent growth in revenue from BFSI, while HCL Tech and Wipro’s revenues from BFSI shrank in the June quarter.

In the manufacturing vertical, only TCS and HCL Tech saw robust growth in revenues. For others, revenues from manufacturing fell sequentially during the quarter. One vertical that saw revenues shrink across the board was retail. Both Infosys and TCS believe that this is just a transitory phase and retail clients will have to upgrade their tech set-up to take on the likes of Amazon.

Under pressure

Due to the strengthening rupee, margins shrank sequentially for all five top-tier IT companies. HCL Tech and Infosys, which provide margin guidance, reported operating margins below their guided range.

Salary increments also impacted margins of the companies, apart from one-time visa costs for the year. HCL Tech and Infosys haven’t hiked salaries for all their employees in the June quarter, so there will be some impact of salary hikes in the quarter ending September 2019 as well.

What next?

Despite undershooting, HCL Tech and Infosys have maintained their margin guidance for the year. Revenue growth is expected to be better in the second half of the financial year due to a pipeline of projects that will come on stream later in the year.

Infosys is so confident about its pipeline of projects that it has upgraded its revenue growth guidance in constant currency terms to 8.5-10.0 per cent from 7.5-9.5 per cent. HCL Tech closed the $1.8 billion purchase of certain IBM products, which the company’s managements says will add $650 million revenue in the next 12 months from the quarter ending September 2019.

This, the company says, will aid margin growth. Wipro and Tech Mahindra are aiming for their bellwether telecom verticals to show revenue growth in the rest of the financial year.

The weakening rupee, augurs well for margins of IT companies. But any adverse change in the global economy could severely impact growth assumptions built into the stock prices.

Published on August 25, 2019
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