IT stocks have corrected sharply after Infosys and TCS forecast a weak quarter last month. Infosys said its 2013-14 US dollar revenue could grow at the lower end of its 11.5 to 12 per cent projection because of reduced spending by high tech enterprises and retail customers. TCS told analysts that revenue growth could be weaker from the previous quarter on account of weak domestic spending.
Nomura says revenue growth of tier-1 companies is likely to slow at 2.3 per cent sequentially in Q4 as against 2.7 per cent in Q3 because of seasonal weakness and flattish growth at Infosys and TCS. However, quarterly performance will vary from company to company.
Hence Infosys may report a 0.4 per cent sequential decline in revenues and a 50 basis point sequential rise in margins (due to cost efficiency measures), Barclays estimates.
TCS may grow 2 per cent sequentially, though operating margins may decline by 50 basis points because of reinvestment of profits into business, Kotak says.
Wipro is likely to report in line growth of around 3 per cent and its margins are likely to be flat, analysts say.
HCL Tech (3.4 per cent) and Tech Mahindra (3.3 per cent) may report stronger sequential growth in Q4, Kotak estimates. HCL Tech is likely to report 55 basis points quarter-on-quarter drop in margins because of wage hikes, Barclays says. Tech Mahindra could suffer 160 basis point drop in margins because of wage hikes, the brokerage says.
Tech Mahindra could also suffer forex losses because of the rupee, which has appreciated from 61.80 to 59.91 per dollar in the March quarter.
Commentary on demand environment in US would be keenly watched as it is the biggest market for Indian outsourcers. The US has lagged behind Europe and overall tier 1 IT growth, despite macroeconomic improvements, Nomura says.
Guidance: Infosys' annual sales outlook will be watched to gauge the overall demand for IT. Most analysts expect Infosys to guide for 6 to 8 per cent dollar revenue growth in the 2014-15 fiscal. This may disappoint investors as Infosys grew at 5.8 per cent in 2012-13 and is expected to end 2013-14 with 11.5 per cent growth. Wipro, which gives quarterly outlook, may guide for 2-4 per cent sequential growth in first quarter of 2015 fiscal, Kotak estimates. TCS has indicated that it will grow at a faster pace than this year.
Impact on margins because of rupee appreciation: The Indian currency has gained sharply after plummeting to a record low of 68.85 in August. The rising currency will adversely impact earnings of IT companies. According to Nomura, a 1 per cent rupee appreciation impacts the earnings per share by 1.5-2 per cent.
Infosys management on exits: Nine high-ranking executives have quit Infosys since NR Narayana Murthy returned from retirement in June 2013. Now, current CEO SD Shibulal has also expressed his desire to retire before his superannuation next year. Will Infosys throw more light on these high profile exits?
IT stocks are down 5.7 per cent and 5 per cent over the last one and three months as compared to 4 per cent and 10 per cent rise in the Nifty during the same period. The biggest underperformer among frontline IT stocks has been Infosys, which has fallen 12 per cent over the last month.