Indian IT companies are expected to report muted third-quarter results but investors will be focused on what the sector plans to do to mitigate a slowdown in client spending and a wave of protectionism in its major markets.
FY17 has been one of the most troubling years for the Indian IT sector. Britain’s vote to exit the European Union in June put a crimp in the sector’s growth plans. Cognizant has cut its growth expectations for the year three times, Infosys has done so twice and the National Association of Software and Services Companies (Nasscom) has trimmed the growth target to 8-10% growth from 10-12%.
And analysts say the top-end of the trimmed target may be hard to meet but that FY18 could be better. “December 2016 quarter revenue growth will be muted due to twin combination of usual end-of-the year furloughs and continuing weak spending environment. Indian IT will likely grow 8-9% in FY2017E and could grow at same pace or accelerate in FY2018,” Kawaljeet Saluja, analyst with Kotak Institutional Equities, said in a note.
Analysts expect Infosys’ revenue in constant currency to contract between 0.3-0.6% due to the loss of the Royal Bank of Scotland project, one of the first casualties of the Brexit vote. TCS is expected to grow by about 0.5-1%. Wipro has said its revenue in the third quarter could either contract or grow by 1%, though some analysts are forecasting marginally higher growth than its target. One of the bigger concerns for the year is the fact that even large deal wins that have been announced have not done much to boost revenue growth.
“Deal wins haven’t been showing any signs of let-off. Infosys’ TCV of large deal wins at $3.1 billion is 34% higher YoY, and MindTree deal wins of $888 million are up 24% YoY -quite a contradiction from revenue growth. Companies’ outlook on the balance of these counteracting forces will be keenly watched,” Ashish Chopra, analyst with Motilal Oswal, said in a note.
Infosys COO Pravin Rao attributed the disconnect to the fact that though the company had won large deals, they had not ramped up in the same way as they had in the past. “So what we have seen is though deal wins continue to be healthy for us, some of the ramp-ups have not happened as fast as they anticipated when we won the deal, mainly because of the cautious nature of the current environment, the softness,” Rao told analysts at a CLSA conference in November.
Though Rao added that the even though the ramp-ups were delayed, they would begin to catch up.
Analysts are also keen to hear if spending in the banking and financial services sector, the bread-and-butter for Indian IT, is likely to pick up. The slowdown in spending in BFSI, which contributes over 40% to Indian IT revenues, was a key reason for the outlook cuts.
“We note that a few US listed mid-tier techs have spoken of improving trends and visibility at large financial services clients further supported by our channel checks.In our opinion, abating of cyclical headwinds in the sector should help drive a bounce back,” Manik Taneja, analyst with Emkay Global, said. Taneja added that his checks with industry analysts show signs of pent-up demand.
Even if client spending returns, Indian IT companies will have to deal with increasingly more restrictive visa rules that will hurt margins. Last week, two US Congressmen reintroduced a bill to raise the minimum wage for the H-1B visa to $100,000 from $60,000 currently and remove the exemption for those with Masters degrees.
“There is a fair bit of a certainty that 100,000 number is going to come through. Looking forward, it seems margins are going to be a bigger problem in FY18,” Girish Pai, analyst with Nirmal Bang, said.