IT companies likely to report stable earnings in fourth quarter of FY17: Experts
According to research firms, IT companies are likely to report stable earnings for the fourth quarter (Q4) of fiscal year 2016-17 (FY17) which ended on March 31, 2017.
1.The top-four IT companies’ revenues are likely to grow by 1.0-4.5% in US dollar terms, says SBICAP Securities
2.TCS and HCL Technologies are poised to lead organic growth among large-caps, says Religare Institutional Research
3.We estimate 0-2% QoQ organic US dollar revenue growth for the top five players, helped by 24-44 basis points cross-currency uplift, says JM Financial
As the earnings season kicks off this month with Infosys being the first IT company to announce its fourth quarter (Q4) results on April 13, research firms have projected a stable quarter for IT companies with an anticipation of the cross-currency movements to have minor impact on their revenues.
"We expect a steady quarter for our IT coverage universe in the fourth quarter (Q4) of fiscal year 2016-17 (FY17), with large caps likely to report US dollar revenue growth of 1-3% quarter-on-quarter (QoQ) and range-bound margins. TCS and HCL Technologies are poised to lead organic growth among large-caps," Religare Institutional Research said in research report on April 6.
The research firm has predicted a mixed quarter for IT companies falling under mid-cap index.
"We expect a mixed quarter for mid-cap IT services with 0-2.5% QoQ US dollar revenue growth. The Indian rupee has appreciated against the US dollar on a period-end basis and will affect other income QoQ. With improving global macro data, the focus will remain on Infosys’ FY18 guidance," it further said.
Echoing similar views, JM Financial in its report dated April 5 said,"We estimate 0-2% QoQ organic US dollar revenue growth for the top five players, helped by 24-44 basis points cross-currency uplift – after two successive quarters of a negative impact – in a seasonally modest quarter."
"Constant currency revenue growth is likely to stay soft for the top five players, though a positive cross-currency should uplift the reported growth. We expect margins to be broadly stable; the impact of 4.4% Indian rupee appreciation through Q4 FY17 is likely to be limited due to its quarter-end concentration plus costs rationalisation across most players," it added.
"We expect Infosys to guide for 7-9% constant currency revenue growth for FY18, taking a more calibrated stance versus the aggression of last year," it said.
It further said,"HCL should report 4% US dollar revenue growth including Butler Aerospace and Geometric acquisitions ($ 32.3 million JMFe) + IP tie-ups ($25 million JMFe). We also expect a strong 4% QoQ US dollar revenue growth for OFSS, helped by 60% YoY growth in license sales."
However, SBICAP Securities has projected IT companies under its coverage to record moderate organic growth in Q4 earnings due to seasonal factors.
"We expect companies under our coverage universe to deliver a mixed bag margin performance due to the stronger rupee, low margin acquisition integration, legacy business pricing pressure and S&M investments, partly negated by operational efficiencies," cited SBICAP Securities in report dated April 3.
"The top-four IT companies’ revenues are likely to grow by 1.0-4.5% in US dollar terms. Although the relatively stable cross-currency movement is anticipated to bear a minor impact on revenue, a stronger rupee is likely to weigh on margins," SBICAP Securities said.
"We expect Infosys and HCL Technologies to guide 7-9% and 11-14% constant currency (CC) revenue growth for FY18e," it further added.
According to SBICAP Securities, here are key things you should watch out for in Q4 earnings of IT companies:
1.Infosys’ and HCL Technologies' FY18 revenue growth guidance
2. TCV of deal wins during the quarterand deal pipeline
3. Update on recent acquisitions and deal
4. Management commentaries on:
A.2017 IT budget;
B.Demand environment particularly BFSI and discretionary spends
C.Demand in healthcare post uncertainty on Obamacare
D.H-1B visa dependence and risk mitigation measures
E.Traction in digital business and investment plan
The research firm has predicted Infosys to follow its competitors and will announce its share buyback plan in April.
"After its peers announced buyback in the last 12 months, we expect Infosys to follow suit and issue a buyback announcement in April," SBICAP Securities said.
According to HDFC Securities report dated April 11, the fourth quarter (Q4) results of IT companies will witness a mild pickup in the sector with the highest sequential growth in the last three years.
"We remain cautious in mid-cap IT, given that they are more susceptible to technological disruptions, Visa/currency headwinds, and narrower valuations (large-cap/mid-cap IT at 14.3/13.3x FY18E and 12.8/11.1x FY19E)," cited HDFC securities in a note.
HDFC Securities has projected Tata Consultancy Services (TCS) to post 1.9% revenue growth, Tech Mahindra at 1.8%, Wipro at 1.7% and Infosys at 1.0% earnings on quarter-on-quarter (QoQ) basis.
Among midcaps IT, Cyient and Zensar will lead revenue growth, while eClerx and Hexaware will likely to lag, it added.