IT may fail to reboot revenue and profit growth for yet another quarter

56349355The December 2016 quarter is expected to be dismal again for top information technology (IT) companies in terms of revenue and profit growth.According to the average of the estimates of three brokerages and forecast of the ET Intelligence Group, the top five software exporters are expected to report a modest 1.1% sequential increase at the aggregate level in revenue and 1.7% rise in net profit, both denominated in the rupee. In the previous quarter, revenue and net profit had grown by 1.4% and 2.2%, respectively .

The sample of companies includes Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies and Tech Mahindra mentioned in the descending order of their revenues. “December 2016 quarter revenue growth will be muted due to the twin combination of usual end-ofthe-year furloughs and continuing weak spending environment. Tech Mahindra and HCLT (HCL Tech) will report a strong quarter, while the rest will have a weak print,” men tioned Kotak Institutional Equities in a report.

A higher volatility in the currency market will also affect the performance of companies in the December quarter. The British pound and the euro depreciated by 5.6% and 3.1%, respectively , against the US dollar in the quarter compared with the previous one. “We expect cross currency to mar revenues by 70-120 bps,” said Edelweiss Securities in a report.

While the revenue and profit growth is likely to be weak, companies are expected to repeat the resilience they shown on the margin front in the pri or quarter following cost control and focus on improving revenue mix towards offshore projects.
“Most players surprised positively on the margin front in the September quarter despite the subdued volume growth due to a tighter bench (the number of employees who were not deployed on projects) and manpower costs management.We expect this to sustain as hiring remains opportunistic with an active control of the staffing mix,” said JM Financial in a report.

Among the top five, Tech Mahindra is expected to report a strong 21.8% sequential growth in net profit con sidering the absence of one-off restructuring cost, which had marred its performance in the previous quarter, and the integration of the acquired business of Target Group in the December quarter. Its revenue growth at 3% will also be the fastest among peers.
Infosys is likely to maintain the constant currency guidance of 8-9% dollar denominated revenue growth for this fiscal while it may slash the estimate in terms of US dollars given the cross currency fluctuations.