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TCS, Infosys, Wipro brace for slowest topline expansion

tcsTop IT companies are likely to report faster revenue growth during the March quarter compared to three months ago, but on an annual basis are bracing for their slowest top-line expansion in a year that has seen disruptions from currency volatility, weather calamities in key locations and slowdown in client spending.
At least half a dozen brokerages, that ET spoke to, expect India’s top five software exporters to post sequential revenue growth of about 2%, with Infosys and TCS largely expected to lead the earnings season this quarter. Infosys kicks off the earnings season on April 15.

A relatively good fourth quarter will still not be able to mask an otherwise lack lustre year for an industry that is facing a midlife crisis — a far cry from the 2000s when companies grew at an explosive pace and 30-40% growth rates were seen as par for the course. For FY 16, that growth rate has dropped dramatically to an average of single digits for India’s top five software exporters.
Analysts at Nirmal Bang Institutional Equities wrote in a note on March 14 that the relationship between profit growth of S&P 500 enterprises and Indian IT services spending growth has waned since the 2008 global financial crisis. Instead, they see a strong correlation between S&P 500 companies’ revenue growth and Indian industry’s revenue growth in US dollar terms.
“Thus, industry growth came in at 10.3% in FY16 in USD terms (source: Nasscom). If we look at the narrower group of tier-I Indian players, the growth has been to the tune of only 7.5%, which seems more in line with our analysis,” they wrote.
According to Bloomberg estimates, Infosys is expected to lead the pack with FY16 revenue growth expected to be around 7.5% in actual currency terms and around 11-12% in constant currency terms.
Overall, this year has not been kind to India’s top software firms, with growth rates expected to be at their lowest point since the Lehman crisis triggered a global financial meltdown in 2008-09.
What is also starting to happen is a divergence in commentary, with Cognizant warning of lower growth in 2016 due to macroeconomic volatility, while TCS immediately came out and reassured investors that it was not facing the same challenges as Cognizant.
“The quarter is weak. But the degree will depend on whether Cognizant’s guidance was truly company-specific or more widespread. Even this month, TCS sounded confident on demand on its analyst day so while the quarter may be muted, it won’t be a disaster,” said a Mumbai-based analyst at a domestic brokerage.
ET had first reported on December 18 that India’s largest homegrown multi-billion-dollar IT services firms are set for a reality check with revenues likely to grow at the slowest pace since the global financial meltdown.   

“More interestingly, we are really seeing diverging commentary now. Accenture has raised its guidance for the year ending August, based on strong demand. That is the same period for which Cognizant says demand will be weak. Though the broad patterns are the same — economy, spending — the impact on different companies is showing up differently,” the above-mentioned analyst added.

 For the March quarter, Infosys and TCS are expected to headline the earnings season and the top five, barring Tech Mahindra, are expected to post average sequential revenue growth of about 2%.

 “The March quarter should be okay, by normal Q4 standards. The top five should end up at least meeting expectations — both Infosys and TCS sounded very bullish earlier during the quarter. So the expectation is that they should all post at least 2 per cent, except Tech Mahindra,” said a Mumbai-based analyst at a foreign brokerage.

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