Investors will look at how TCS has performed when it announces the quarter's results on October 13, and the forecast from Infosys on October 14
The country's top software exporters are expected to report weaker numbers for July-September, traditionally a strong quarter. They have struggled to match growth from new segments such as digital to offset slowing revenue from traditional services across divisions.
Information technology (IT) services companies have seen cancellations and downsizing of projects from customers in banking and financial services, beside health care, due to uncertainty after Britain's decision in June to exit the European Union. Also, a shift in technology adoption.
Everest Group, an IT researcher, found in a recent study that traditional business for the top 20 outsourcers grew only one per cent over a year before, after factoring currency changes and acquisitions. On the other hand, business relating to new technologies and capabilities grew 22 per cent.
“The industry is undergoing a rapid maturing, in which growth is decelerating at the same time as new technologies and capabilities are disrupting it, while creating new growth segments,” said Peter Bendor-Samuel, CEO, Everest Group.
The country's top five software service entities - Tata Consultancy Services, Cognizant, Infosys, Wipro and HCL Technologies - are among the top 10 list in the Everest study. Four of every five dollars earned by Indian IT companies still come from traditional services such as application development and maintenance, package implementation and remote infrastructure services, the researcher says.
The rest come from newer technologies - cloud, digital services, automation, artificial intelligence. Where contracts are smaller but profits higher, these being discretionary spending.
Last week, global outsourcer Accenture saw its digital business grow 30 per cent, helping it beat Street estimates on revenue and profit. Indian companies have struggled to keep pace with this shift. Since August, TCS, US-based Cognizant (it follows the offshore model) and Infosys have warned investors of muted quarterly results, due to slowing business from older customers.
Investors will look at how TCS has performed when it announces the quarter's results on October 13, and the forecast from Infosys on October 14. Infosys had cut its annual forecast in the first quarter and indicated it could revise for forecast downwards, due to an uncertain business environment.
“We see our Q2 (September quarter) growth is going to be higher than the Q1 (June quarter) growth but we do see risks that would get us towards a territory of downward revision of guidance because the atmosphere during the course of Q2 has worsened (from) what we saw at the beginning of Q2,” Infosys chief executive Vishal Sikka said on September 15.
Analysts are keen to look at the commentary on company margins and the sector's trajectory in the medium term.
“The pricing environment for legacy services has been challenging for about two years. During this period, realisations have moderated materially (and) have likely been reset on a significant proportion of business for some vendors. However, anecdotes on price competition in large deals and further price cuts with existing clients continue. We believe margin commentary will be the key to assess the sector’s growth in the medium term,” went a note by Sandeep Muthangi of IIFL Institutional Equities.
The September quarter is traditionally a better one for margins as well, since it does not have salary rises and visa cost expenses.
“Slowdown in growth rates and a strong rupee will lead to toning down of margin expectations by companies. Infosys will likely guide (forecast) for margins at the lower end of the band of 24-26 per cent and TCS for a FY17 Ebit margin below 26-28 per cent.
The September quarter is characterised by sequential recovery in margins for several players, following the wage hike and visa cost-led margin drop in the June quarter. This trend will continue for Infosys and TCS but the extent of sequential recovery will be muted, given cross-currency headwinds, marginal appreciation in the rupee and weak growth,” went a report from Kotak Institutional Equities.
It added: “We expect a 40-50 bps improvement in the margins of Infosys and TCS. HCL and Wipro’s margins will decline 100-120 bps, largely due to the partial impact of wage hikes over and above cross-currency headwinds. Tech Mahindra’s margins will decline marginally due to one-off restructuring costs associated with largely on site-centric employee separations. We expect companies to moderate margin guidance (expectation).”
On revenue growth, analysts expect the top tier-I players to report numbers in the range of 0.1 per cent to three per cent rise in dollars (sequential).
Photograph: Reuters