IT companies to benefit from currency, lower visa applications in Q1

The recent currency fluctuation is expected to show some positive gains for the IT sector in their first quarter (Q1FY19) results starting next week.

The June quarter results of IT firms usually witness a strong impact of employee costs in the form of visas expenses as well as incremental wages. However, given the lower visa applications this year as well as a slowdown in hiring, these impacts won’t be that evident this year, note analysts. The impact of visa issues might also manifest in hiring numbers for these companies.

“With USD appreciating 2.3 per cent, 3.0 per cent and 3.7 per cent QoQ against GBP, EUR and AUD, respectively (average rate), we perceive cross currency headwinds of 80-100bps for top-5 IT players. We expect revenue growth of almost all companies to pick up, barring a few company-specific issues, and optimistic commentaries,” Sandip Agarwal, research analyst at Edelweiss wrote in a recent report.

While TCS is expected to lead the pack with 3.1 per cent QoQ USD revenue growth, HCLT is estimated to grow 2.4 per cent QoQ (2.1 per cent inorganic) and Infosys 2.3 per cent. Wipro and Tech Mahindra are estimated to report a 2.0 dip each in their revenue on quarterly basis, noted Edelweiss.

With TCS moving into the $100 billion (in terms of market cap) club, the next top candidate Infosys is also being re-valued. With Infosys stocks already rallying almost 20 per cent up over the past three months, some good news is expected from both the top two IT giants.

In terms of banking, financial services and insurance (BFSI) segment, TCS will be most closely watched as the street is yet to be at ease with TCS’ outlook on BFSI although North American banks seem to have stabilised overall.

“The cross currency tailwinds would mean better margins for the quarter. However, given the lack of organic growth from the other three, the competition this quarter has really boiled down to TCS and Infosys,” said Madhu Babu, research analyst at equity research firm PrabhudasLilladher.

Following a strong revenue guidance, country’s fourth largest IT services company HCL Technologies is expected to replace Wipro in the third spot given that in the previous quarter HCLT was barely $24 million short of Wipro’s revenue numbers. Wipro, even though, has been picking up the pieces following client insolvency and a slowdown in key healthcare sector, is expected to report flat revenue growth.

“Among mid-caps, growth should stay strong in Mindtree (4.0 per cent QoQ) and recover in Persistent (3.9 per cent) after a weak 4QFY18 but could moderate in others (NIIT Technologies/Cyient/L&T Technologies),” noted Pankaj Kapoor, research analyst, JM Financials.

Analysts have also suggested a stronger scrutiny of digital deals to understand the actual deal sizes as well as whether the IT players are playing substantial consultative roles in the digital deals. The street would look out for a clear direction as to where the ticket sizes of these digital deals are headed for.

“One of the major questions that will be asked is about the digital deal sizes and whether the companies are actually generating more consultative roles in digital,” said Ashutosh Sharma, VP & Research Director at Forrester Research.