Monday, October 5, 2015

Infosys likely to race ahead of peers in Q2

The September quarter is likely to be a reasonably good one for most Indian IT companies thanks to healthy demand trends and it being a seasonally favourable period. 

Infosys, after a strong June quarter, is expected to outpace peers in the September quarter. Analysts on an average expect Infosys to post 6.2% sequential growth in its rupee revenues, whereas this number for TCS, Wipro and HCL Technologies’ is seen at 5.8%, 5.3% and 3.2%, respectively. 

While healthy client mining will aid Infosys' topline, client specific issues are seen eating away some of the revenue growth of HCL Technologies and Wipro. Though TCS’ revenue growth is likely to be strong, but the street will watch out for the performance of its Diligenta and energy businesses, which have impacted the company's revenues in recent quarters. 

Both HCL Technologies and Wipro could see unfavourable cross currency movement (Australian dollar, Brazilian real and rupee vis-à-vis the US dollar) impact their performance in the quarter. 

One key parameter the street would keep an eye on for all companies is the trend in realisations for the quarter as well as the year, especially given the intensifying pricing pressure for both Accenture and Cognizant.

On a like-to-like basis or as measured in constant currency terms though, the revenue growth for these companies is seen at 1.8 to 4.6% as compared to the quarter ending June 2015, with Infosys leading and HCL Technologies lagging peers. 

EBITDA margins are seen inching up aided by rupee depreciation and lower visa costs for the top two companies, with TCS and Infosys likely to witness a 50-100 basis points margin expansion in the quarter. But, wage hikes could reflect on margins of both Wipro and HCL Technologies, with latter seeing a higher impact due to a one-time revenue reversal in the quarter.

While Infosys is seen leading the pack on the revenue growth front, TCS is expected to lead at the net level, with its net profit estimated to grow by 7% sequentially aided by EBITDA margin expansion. TCS' diversified revenue model, relatively stable pricing and focus on improving revenue per employee augur well for its margins. 

For Infosys, net profit is likely to grow 6.4% in the quarter. The pace of profit growth though could vary depending on the how soon its various efficiency measures bear fruit. Wipro is seen reporting flat profit, and HCL Technologies' is estimated to slip 3.2% sequentially given the client specific issue and recent guidance warning.

While the September quarter performance is important, the commentary on outlook is crucial. Analysts believe Infosys will maintain its FY16 constant currency revenue growth guidance of 10-12%. Wipro management had indicated earlier that it expects growth to gain momentum in the second half of this fiscal. Analysts expect the company to guide for constant currency revenue growth of 2-4% for the December 2015 quarter. Outlook on energy vertical and company’s strategy in the digital business will be closely watched. Notably, Wipro has been lagging peers for some time now and management roadmap on how it plans to catch up will be important. 

In case of HCL Technologies, growth potential in the IMS business will be keenly watched out for. Commentary around future pricing trends and digital strategy will be important for all the companies.

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