Brexit to weigh as TCS kick-starts FY17 results seasons

Brexit, currency volatility, visa cost and wage hikes are among the key factors likely to impact results for of the Indian IT services sector in the first quarter ended June 30, 2016. The April-June quarter is traditionally a strong quarter for the topline growth of companies.

Estimates for Q1FY17 numbers of Tata Consultancy Services (TCS), India’s largest IT services provider that begins the results season by announcing them on July 14, is better placed than last year.

To begin with, TCS enters the year with its portfolio issues resolved. The company has in the last few quarters stated that the Latin America has turned over, and that issues in the insurance segment have been resolved with Diligenta bottoming out.

Traditionally, the first quarter has been a strong one for TCS as well as for the sector. Analysts are expecting a revenue growth of 3.5% to 4% (constant currency) on a sequential basis.

TCS does not provide for revenue guidance, hence management commentary will be important to gauge demand trends. Management commentary will also be crucial on impact of Brexit. TCS has the maximum exposure to Europe with 26% revenue coming from the region.

Many while agree that it too early to understand the impact of Brexit, any commentary from TCS management will be sought for.

“Our industry growth forecast implies high single-digit revenue growth from the UK. Clearly these estimates are a tall order given a high likelihood of the UK moving into recession in 2017. We believe that a realistic growth forecast in the near term will be low single digit. When rolled up to the organization level, this will impact c/c revenue growth by 40-90 bps across IT companies, with the highest impact on TCS, HCLT and Tech Mahindra and the least on Infosys,” said a report by Kotak Institutional Equities report.

Margins for the quarter will be under pressure for both TCS and Infosys due to wage hikes and visa cost. For TCS, EBIT is expected to be down by 140-150 basis points.

TCS has been witnessing a strong growth in its digital segment, analyst and the street will look for growth traction. The company has been among the few that has shared its revenue break up from this segment. At the end of the fourth quarter, digital revenue was 15.5 per cent with revenue of $2.3 billion. This was up 52% year-on-year on a constant currency basis.

Following close behind is Infosys, which announces its Q1 results on July15. The street will keenly await to hear management comment on guidance. The company has guided for a constant currency growth rate of 11.5-13.5% for the year.

Infosys remains to be on the top of the chart among the analyst with revenue growth expectation in the range of 4-4.2% in constant currency. Margins are expected to decline by 150 bps points.

Other than the guidance, street will also like to hear management talk about impact of Brexit. Europe exposure in case of Infosys is 23.4%.