IT firms brace for another tough year ahead

The October-December quarter, generally a soft one for India’s information technology (IT) sector due to holidays and furloughs in certain sectors, is expected to be further affected this year because of currency volatility.  

According to analysts, the top four Indian IT services companies’ top line growth in dollar revenue could be more or less flat, with margins showing a slight improvement due to the rupee’s depreciation.  

In terms of full-year performance, analyst believe calendar year 2015 will be similar to 2014 in of growth or even slightly better.

They will, therefore, watch for management commentary on client budgets and how firms are looking at utilising the gains from a falling rupee.

During the quarter, the euro, pound and Australian dollar depreciated close to six per cent, five per cent and 7.8 per cent, respectively, against the US dollar.

The currency depreciation will affect the US dollar revenues, as Indian IT services companies convert the other currency revenues into dollars. Infosys will be the first one to announce its results on January 9, followed by  Consultancy Services (TCS) (January 15), and Wipro (January 16).  

Analyst Business Standard spoke to said top line revenue growth in dollars for the four biggest IT services players would be nearly flat, in the range of 0.2-2.1 per cent due to cross-currency headwinds, which will have an impact of 1.6 per cent to 2.2 per cent.

On a constant currency basis, though, US dollar revenues of the top companies could grow by 2.2 per cent to 3.5 per cent.  

The currency volatility, analysts say, might not allow Indian IT players to make good of the rupee’s fall against the dollar.

The Indian currency has depreciated about 2.7 per cent against the dollar, a positive for revenues reported in rupee terms.  

“The dollar has appreciated 5.2 per cent to 5.8 per cent against the euro/pound. This will hurt dollar revenues by 1.5-2.2 per cent."

"Margins will likely remain flat or improve slightly, led by the rupee’s depreciation. Overall, the outlook on IT budgets and spends in calendar year 2015 will be a key monitorable,” Religare Institutional Research’s Rumit Dugar and Karan Taurani said in their report.   

“If you compare the movement of other currencies like the pound, euro or the Australian dollar, vis-a-vis dollar, the rupee’s movement versus the dollar does not look that significant.

The rupee has depreciated around three per cent against the dollar, whereas other currencies have fallen more than five per cent each.

So, the impact on margins will not be significant,” said Ankita Somani, research analyst, MSFL.

In terms of individual companies, TCS and HCL Technologies might be the most affected because of currency movements.

Both are expecting an impact of 220 basis points. HCL Tech’s margins will also be affected by wage hikes coming into effect in this quarter.

Though Infosys and Wipro are better placed to manage currency headwinds, both will have specific issues affecting growth.

“We expect Infosys to narrow its guidance to seven per cent in dollar terms for 2014-15. In the case of Wipro, performance will be marginally below the mid-point of two-four per cent guidance range. The focus will be on the implications of a decline in oil prices on IT budgets of energy clients. Energy & utilities is Wipro’s fastest-growing practice and accounts for 17 per cent of its revenues,” said Kotak Institutional Equities’ Kawa-ljeet Saluja and Jaykumar Doshi.  

Among the large-caps, Tech Mahindra, the fifth-largest IT services provider, is expected to perform the best, as it see a ramp-up of deals in the enterprise segment.

It will have a positive impact of 1.3 per cent on the top line, as it consolidates its Mahindra Engin-eering Services acquisition.

While analysts are keenly awaiting management commentary to gauge the demand environment, many are of the view that 2015 will be similar to 2014 in demand and growth, if not better.

Among the positives suggesting this year will be similar to or better than the previous one are an improving economic scenario in the US, expected recovery in IT spending in the banking vertical after two years that saw regulatory fines in the US, large deals and continuing market-share gains by Indian players.  

“In the past month, the National Stock Exchange’s CNX IT index corrected by about six per cent due to the fear of growth tapering in 2015-16 and a negative impact of cross-currency headwinds. "

"We believe 2015-16 will see an overall improvement in the demand environment, driven by an improvement in the US geography.

It could fall short of earlier expectations but will still be better than the estimates for 2014-15,” said an update by Sharekhan.  

“There are a few negatives as well. A decline in oil prices, for example, will have an impact on energy & utilities. This will affect select segments of manufacturing amid volatile demand in emerging markets. On the whole, we believe demand will be similar to that in 2013-14, if not better,” said Saluja and Doshi.  

However, growth in clients’ digital initiatives through incremental spending, rather than self-funding mechanisms (aggressive cost take-outs in the legacy business), could be an additional growth driver.