Soaring rupee set to hit Infosys, TCS, Wipro, HCL Technologies Q4 results

The January-March quarter, a seasonally weak one for the Indian IT sector, may not show TCS, Infosys, Wipro and HCL Technologies in good light, with the appreciating rupee against the US dollar denting their operating profit margins by 40-50 basis points.

The Street expectation is that the Big Four of Indian IT may end up reflecting a sequential revenue growth in the range of 1.5-3.5% with HCL Technologies expected to post the highest rise while TCS is likely to maintain its momentum as the leader. For the fourth quarter of FY17, the rupee appreciated by 2% against the dollar, throwing a spanner into the works.

Brokerage houses such as Morgan Stanley, Credit Suisse, CLSA and HSBC expect the impact from rising rupee on the margins to be in the range of 40-50 basis points. Morgan Stanley in its note said, “Cross currency is likely to be a tailwind (10-70bps) to revenues, while rupee appreciation (-2%) will be a headwind to margins this quarter.”

However, the industry may see some change for the better in FY18, analysts feel, with expected pickup in demand in sectors such as BFSI and retail.

Brokerage house HSBC in its preview note on the fourth quarter results, said, “The 4Q FY17 result season is unlikely to provide material positive indicators for the 2017 demand environment. A better macro environment in the US and better business outlook for US banks should lead to higher IT spend over the coming quarters. This is a broader expectation by the Street.”

The fourth quarter has been an interesting period with cross-currency movement being positive in the range of 25-30 basis points for the Indian IT companies which would lift the US dollar revenue while appreciating rupee impacting the margins, analysts said.

There is an expectation that Indian IT companies would provide an more optimistic commentary on the outlook for FY18 as there seems an demand uptick from the BFSI segment, which is one of the largest contributors to the revenues.

According to CLSA, the demand is expected to perk up with greater contributions from BFSI and manufacturing segments but there could be a drag in sectors like telecom and energy. It also felt that Accenture’s recent commentary following its quarterly results point towards a healthy demand environment. “While 4Q may be too early to see it, given the new US administration and immigration, clients could be in a better frame of mind for discretionary projects,” CLSA said in its note.

The Indian IT companies are not just battling a situation of tepid demand outlook but an increasingly unfavourable policy environment especially from its largest market – US.

Morgan Stanley said, “With uncertainty around visa/tax regulations in the US and possible risks from the UK exiting the EU, we think the probability of an upbeat outlook for FY18 could be low despite positive commentary.”