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Rediff.com  » Business » BFSI segment crucial for the IT sector's performance

BFSI segment crucial for the IT sector's performance

By Shivani Shinde
July 06, 2012 15:17 IST
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Volume growth and performance of the banking, financial services and insurance (BFSI) division will be a key aspect as the Indian information technology services sector draws closer to announce its first quarter results for 2012-13.

The two bellwethers of the industry, Tata Consultancy Services (TCS) and Infosys, announce the numbers on the same day (July 12).

The market would be keen to know Infosys' expectation for the second quarter and management commentary from both on the demand environment.

The Street is expecting the April-June quarter to be a muted one, due to slow ramp-ups, uncertainty in Europe and softness in the BFS sector, which constitutes the largest vertical for the top four IT services companies.

These concerns were also the reason for the sector's recent downgrade by Macquire Equities Research.

"Our analysis of the annual 10K SEC filings of the top US BFS companies indicates that optimism on IT spend could be misplaced. Indian IT companies derive around 40 per cent of their total revenues from the banking, financial services and insurance (BFSI) vertical. Due to this overdependence on a single vertical, if the sector faces headwinds of any kind, it could threaten IT earnings. Given the current macro situation, we do not foresee BFSI growing faster than other verticals," said Nitin Mohta and Atul Soni of Macquire Equities Research in their report.

Analysts also say commentary on the BFSI segment will be crucial in the case of Infosys and Wipro, which are hoping for back-ended growth.

"Seasonal acceleration from 2Q in BFSI might not be material in FY13F. Regulation-related spending might be more reallocation-led spending, rather than incremental spend. Hence, the impact of spend curtailment in some areas could impact volume growth in (the second half of 2012-13). Client financials have shown further deterioration, with more verticals showing deceleration," said Ashwin Mehta and Pinku Pappan of Nomura Equity Research.

From a volume perspective, the Street is expecting growth of one to three per cent across the four major players. Volume growth is muted for this quarter, generally a strong one for the industry.

TCS and HCL Technologies are the top pick of most of the brokerage houses and analysts, but the Street would keenly await Infosys' guidance for the second quarter (July-September). "The guidance from Infosys will be as important as ever. The management has been consistent in cautioning that there have been delays in decision making and the uncertainty has increased of late. Management comments on the macro scene and client spending will gain additional importance," said Dipen Shah, IT analyst at Kotak Securities.

Analysts expect that Infosys would further reduce its FY13 revenue guidance, owing to the cross-currency fluctuations.

What will matter is the outlook the company will indicate in constant currency values for the second quarter. The Street is expecting Infosys to reduce its FY13 dollar revenue guidance from the earlier eight to 10 per cent to six to nine per cent.

"We will focus on Infosys' constant currency numbers. If the company guides for anything below four per cent for the second quarter, it will impact the stock. Also, any cut in the volume guidance will be negative. What will also matter is its utilisation rate, rather than attrition rate, because in this environment, people will not leave their jobs. In the case of utilisation, it will be clear how much new work is coming," said an analyst from a leading brokerage.

In the case of TCS, management commentary will be important, since it does not provide any expectation.

"We do see volume growth of 4.6 per cent, but BFSI performance will be crucial. We would also look for any change in the demand outlook, especially in BFSI, and pricing trends in BFSI, where clients are under immense business pressure to cut costs," said Mehta of Nomura.

Other factors

The first quarter will see the gains of a depreciating rupee, but the Street is not reading much into it. The rupee against the dollar has depreciated 7.3 per cent, against the euro by 5.3 per cent and the pound by 8.7 per cent.

The dollar has appreciated versus the euro by 2.3 per cent and remained almost flat compared to the pound. To that extent, the impact on dollar-based revenues is expected to be slightly higher as compared to the previous quarter.

However, rupee-based revenues for the quarter are expected to be positively impacted for all companies.

The rupee depreciation will also positively impact margins by around 225 basis points. According to an analysis of Edelweiss, it would largely help absorb the impact of wage rises and H1-B visa costs.

The recent quarter results of Accenture and Oracle show that demand for technology services and products continues. Analysts say clubbing the top four into one basket will be difficult, as performance will be different. "We believe that differentials in performance across players will increase and market share-focused players such as HCL Tech, TCS and Cognizant are likely to perform better than and ahead of turnaround candidates such as Infosys or Wipro. This is more so as clients are focused on cost saving and because market share gain-focused players typically win a disproportionate share during such times, we have found," said Mehta of Nomura.

FY13 will be a difficult year for the industry, due to the European uncertainty. It will also increasingly face anti-outsourcing rhetoric as America prepares for elections, and a slow ramp-up in discretionary spending.

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Shivani Shinde in Mumbai
Source: source
 

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