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Q2 Earnings Preview: Yet another weak quarter for IT sector?

Q2 Earnings Preview: Yet another weak quarter for IT sector?

Q2 Earnings Preview: Yet another weak quarter for IT sector?
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By Pranati Deva  Oct 8, 2019 10:50:50 AM IST (Published)

The highlight of the quarter will be the commentary on the deal-flow and CY20 outlook by various companies.

IT firms TCS and Infosys are ready to kick-start the September-quarter earnings season.  While the country's largest IT services firm TCS will report its Q2 earnings on October 10, Infosys will report its quarterly results on October 11.

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Analysts expect Indian IT companies to report a muted set of results in Q2FY20 owing to muted growth and largely unchanged margins. However, they expect the strong deal flow momentum to continue providing a bright outlook for the sector. According to analysts, most large-cap companies are expected to report steady growth, while mid-cap companies may stand out in Q2FY20.
Highlights of the quarter
The highlight of the quarter will be the commentary on the deal-flow and CY20 outlook by various companies. Commentary from large-caps on client IT spending, pricing pressure, and growth in digital services will be the key to watch. FY20 guidance by Infosys and HCL Tech and next quarter guidance by Wipro will be the key metrics to watch out for, say brokerages.
"Sharp appreciation of the dollar against other global currencies will impact the reported topline growth negatively. We expect the sector companies to report constant currency (CC) organic revenue growth of over 1 percent to 5.7 percent QoQ with 50-100bps negative cross-currency impact," said Phillip Capital in a report. It added that margins will expand QoQ for most of the companies due to sharp rupee depreciation against dollar and absence of visa cost.
Would the top 5 IT firms do any better?
Reliance Securities expects IT firms under their coverage universe to post combined 2.9 percent QoQ rise in dollar revenue in Q2FY20. Because of the rising dollar, it says dollar revenue growth will trail CC growth by 30-90 basis points. One basis point is a hundredth of a percentage point.
"The top-5 IT firms are likely to post 1-6 percent QoQ dollar revenue growth with CC revenue growth likely at 2-7 percent QoQ. HCL Technologies is likely to lead the pack with 6.8 percent CC revenue growth, aided by the consolidation of IBM product business. Among mid-sized firms, Hexaware Technologies and Cyient should outperform with 13 percent and 4.4 percent QoQ revenue growth, respectively," the brokerage explained.
Meanwhile, the brokerage added that FY20 growth and margin prospects assume critical importance in Q2FY20, given generally poor performance in Q1FY20.
Global macros are worsening with major economies seeing slowing growth and even de-growth in some cases like Germany. TCS and HCL Tech are the brokerages' top picks in the large-cap space and Hexaware and Sonata in mid-cap space.
Edelweiss estimates the top five Indian IT players would report organic revenue growth of 1.9–3.5 percent QoQ in constant currency (cc) in Q2FY20. Barring Tech Mahindra, it expects margins of the remaining four to rise by 50–90 bps QoQ as most headwinds such as wage hikes and visa costs have blown over.
While revenue growth may still elude mid-caps, the brokerage expects them to get on the road to margin recovery this quarter. It will keep an eye out for an increase in deal sizes, demand commentary by industry, and commentary on margin outlook for H2FY20. It maintains ‘buy’ on Infosys, Tech Mahindra, and HCL Tech, and ‘hold’ on TCS and Wipro.
According to Motilal Oswal, although July-September is the strongest quarter for the industry, softening BFSI momentum is a cause for concern. Sequential organic constant currency (CC) growth across our tier-I universe is estimated at 0-2.5 percent, with TCS, and Infosys likely to grow at the higher end of the range, the broekrage said, adding that overall CC growth at Infosys and HCL Tech will better that range, led by inorganic contribution.
Prabhudas Lilladher also expects revenue guidance to improve for HCL Tech and Infosys led by strong past large deal wins which helps to provide visibility ahead. Strong revenue growth in Infosys will be aided by the ramp-up of deals and broad-based growth, it added. Meanwhile, HCL Tech revenue growth will be benefited by the completion of the acquisition of select IBM products. TCS revenue growth and outlook will be challenged by headwinds coming from Europe BFSI, whereas, Tech Mahindra growth will be aided by communication vertical but flat growth in enterprise vertical will negate it, it noted.
The brokerage further remains watchful on overall demand environment as the US is entering elections with continued uncertainty around trade war.
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