IT Biggies May Note Worst Q2 Performance in a Decade

India is the world’s biggest sourcing destination for the information technology (IT) industry, which accounts for approximately 67 per cent of the US$ 124-130 billion market. The industry employs more than 10 million workforces. More importantly, the industry has driven the economic transformation of the country and altered the perception of India in the global economy.

Domestic IT sector will possibly see its weakest September quarter in the last 8 years and analysts also fear that plenty of factors will mute the sector’s growth for the rest of the year, and prompt the industry to cut full year forecast. 

• Slowing growth in the banking and financial services sector.
• Sluggish demand and cautious clients hint the outlook for the year is unlikely to improve.
• Demand environment for IT services stays uncertain with clients under-spending budgets and different  projects cancelled/postponed.
•  Britain’s decision to leave the European Union.

These all have driven Indian IT firms to temper down expectations in the run-up to the earnings season.

Traditionally, the July-September quarter is comparatively a better quarter for the $110 Indian IT sector, facing strong sequential revenue growth during the period. The seasonal strength that heads to strongest sequential growth in the September quarter is hardly expected to stand out this time, as sluggishness in spending by the BFSI vertical weighs on the industry. In terms of dollar, growth will be pegged back further by steep depreciation of the GBP (pound) v/s the US dollar.

TCS and Mindtree – Tata Consultancy Services, the robust IT services player, and midsized Mindtree have already toned down their anticipations in what should be a seasonally strong period. 
As of now, TCS share price is trading at 0.58 per cent while Mindtree is quoting above 1.30 per cent.

Infosys- Infosys, which has already slit its forecast once this year, is broadly expected to lower its guidance again. Analysts anticipate Infosys to forecast growth of around 9 per cent for the year, cutting its already lowered guidance of 10-11.5 per cent growth. Intraday on Monday, Infosys share price is trading at Rs. 1022.80.

The top five Indian IT companies are hoped to clock between 0 and 3 per cent growth. The lukewarm second quarter will also make it difficult for the National Association of Software and Services Companies to sustain its 10-12 per cent constant currency growth target for the year. Nasscom has mentioned that it will analyze the guidance after companies disclose their results for the second quarter.

The $108-billion IT sector developed 12.3 per cent last year in constant currency terms. The industry employs more than 3.7 million people currently, but hiring will slow down, highlighting the poor growth prospects and increased automation. The otherwise weaker second half of the year is also hoped to be slower-than-expected, since concerns over the US presidential election and Brexit come closer. UK Prime Minister Theresa May has mentioned  that Britain will go for a ‘hard Brexit’ early next year which will leave a negative impact on the financial services industry in that country.

The slip in the value of pound, stagnant growth, wage hikes and the need to constantly slit costs to customers will mean that Indian IT margins will also be impacted.  Margins will hopefully decline for HCL Tech and Wipro because of wage hikes, stay flattish for Tech Mahindra owing to one-time employee restructuring expense, and for Infosys, given the impact from options expensing, and grow modestly for TCS on operational efficiencies. Despite an improvement, TCS is expected to close the year with a margin of 25.5 per cent under its targeted margin band of 26-28 per cent.

Weaker discretionary spending and rising pricing pressure in the traditional business.