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Seasonally weak quarter likely for IT giants

January 03, 2014 09:21 IST

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Sheetal Agarwal in Mumbai

Seasonal factors such as higher number of holidays and furloughs (due to Christmas, New Year) could hit the revenue growth of IT majors including TCS, Infosys, Wipro and HCL Technologies in the December 2013 quarter.

TCS and Wipro are also likely to be affected by lower IT spending in the domestic market.

Modest rupee appreciation (up 1.4 per cent sequentially) could limit growth in other income and margins for most companies.

Lower working days will also put pressure on utilisation rates.

The Street will actively watch for management commentary on calendar year 2014 (CY14) budgets and key growth drivers.

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Photographs: Reuters

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Barring this seasonal hiccup, overall demand environment is witnessing pick-up across key markets (the US and Europe) as well as in discretionary spending.

This is expected to drive good performance by IT companies over the next year, believe analysts.

“While the December quarter will be soft, we think the outlook on CY14 budget trends and demand commentary would be the key for share price performance”, says Rumit Dugar, IT analyst at Religare Capital Markets.

Most analysts are positive on TCS and HCL Technologies given their superior performance over the past few quarters.

However, consistent improvement in performance is key for the Street to become more favourable on Infosys.

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Image: Infosys Chairman N R Narayana Murthy.
Photographs: Jagadeesh N V/Reuters

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Quarterly revenue growth guidance will be key for Wipro, going forward.

TCS is likely to post a three per cent sequential volume growth -- its lowest over the past three  quarters (1.2 per cent in the December 2012 quarter).

The company’s domestic business (seven per cent of revenues) is likely to be under pressure due to weak domestic IT spending.

The firm’s margins will be impacted by unfavourable rupee move and higher lateral and onsite hiring.

Analysts at ICICI Securities expect the company to post forex gain of Rs 150-200 crore (Rs 1.5 -2 billion), compared with a loss of Rs 375 crore (Rs 3.75 billion) in the September 2013 quarter.

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Photographs: Reuters

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This will aid other income and consequently net profit growth for the company.

Apart from management commentary on demand and pricing scenario, performance of the banking, financial services and insurance sector in Europe will be keenly watched.

TCS remains the top pick of most brokerages, given its consistently strong operational performance.

Infosys’ revenue growth is likely to be the lowest amongst its peers as the firm moves more work offshore and faces pricing pressure.

Lower investments in selling and marketing expenses (down four-five per cent sequentially) could aid margin expansion for the company and also fuel the bottom line growth.

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Image: Wipro Chairman Azim Premji attends the 40th National Management Convention organised by All India Management Association in New Delhi September 26, 2013.
Photographs: Anindito Mukherjee/Reuters
Tags: TCS , Europe

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“We note that the new areas of discretionary spending are expected to be onsite centric and thereby question Infosys’ strategy of shifting more work offshore at this juncture.

“We believe Infosys is at serious risk of revenue losses as it struggles to change its earlier premium positioning,” says Ravi Menon, IT analyst at Centrum Broking.

Attrition, which increased from 15 per cent in September 2012 quarter to 17.3 per cent in the September 2013 quarter, is also a key factor to be monitored.

Some analysts are expecting the company to raise its FY14 dollar revenue guidance from 9-10 per cent to 11-12 per cent as discretionary picks up.

The image is used for representational purpose only

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Photographs: Reuters

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Wipro could see some impact on its India business (eight per cent of revenues) because of softening of domestic IT spends.

Guidance for the sequential dollar revenue growth in the March 2014 quarter will be keenly watched.

Analysts peg this metric at two to four per cent -- in line with that of the recent quarters.

The impact of unfavourable currency move on margin is likely to be offset by better offshore utilisation rate.

Large deal wins and performance of telecom, technology and BFSI verticals will also be monitored.

Growth across the top 125 clients is likely to be strong at the company.

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Image: Roshni Nadar-Malhotra, daughter of HCL Founder & Chairman Shiv Nadar.

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HCL Technologies is likely to continue with its good show driven by healthy traction in the infrastructure management services segment.

Its margins, though, could be impacted by wage increases and employee additions.

Improvement in the core IT services business (62 per cent of consolidated revenues, grown at weak 1-2 per cent over recent quarters) growth is expected and, if achieved, could act as a key catalyst for the stock.

The company has a strong deal pipeline, providing high revenue visibility. Commentary on deals and overall growth will be important.

The company remains a preferred pick of most brokerages and is attractively valued compared to its peers.

The image is used for representational purpose only


Photographs: Reuters

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