TCS, Infosys, Wipro, others to report subdued Q1 numbers; EBIT margins may compress due to wages, visa costs, rising rupee

The $150 billion Indian IT industry is expected to have a sedate start this fiscal, with the first quarter results of top tier companies like TCS, Infosys and Wipro commencing this week. Analysts believe that revenue growth will be subdued and operating profit margins will be under stress in the April-June period, with the demand environment yet to pick up pace. EBIT margins in the first quarter may compress by up to 260bps for large-caps, primarily due to rupee appreciation, wage increases, and visa costs. Sequential revenue growth is expected to go up by only 2.6%, though one cannot rule out the possibility of a decline. Nasscom, the Indian IT industry’s trade body, has projected a muted 7-8% growth for the sector during the current fiscal while a company like Infosys which provides a full year guidance, has come out with a revenue growth projection in the range of 6.5-8.5%.

TCS, Infosys and Wipro ended FY17 with a single digit growth rate and not much is expected to change in the first quarter of the fiscal either. Brokerage house Kotak Institutional Equities in its note said, “We expect Tier 1 IT companies to report muted growth in a seasonally strong quarter due to lack of much anticipated financial services kicker and slower pace of large deal closures.” Kotak expects the organic revenue growth in constant currency to be in the range of-2.8% to 2.6% in the first quarter. The biggest bugbear for the Indian IT companies has been the lack of acceleration in demand from the financial services segment, which is its largest revenue contributing vertical. However, this quarter will have a cross-currency tailwind of 30 to 80 bps, Kotak added.

IIFL Institutional Equities in its note said, “We expect Q1FY18 results season to start on a soft note, largely led by slower-than-expected ramp-up in IT spending, primarily in the BFSI vertical. Several companies, although reaffirming the full-year outlook, have suggested slower growth acceleration in Q1, indicating it could be due to delays in project ramp-ups.”

The operating profit margins in the first quarter is expected to see a decline impacted by the appreciating rupee, salary increases and visa costs. According to IIFL, “We expect EBIT margins to compress by up to 260bps for large-caps, primarily due to INR appreciation, wage increases, and visa costs.”

Brokerage house HSBC in its note said that deal momentum in the US was still slow with visa and protectionist noises. Europe is much stronger, but won’t fully offset the US weakness, it added. “As the US still constitutes 50-60% of the total business, first quarter will remain weaker than usual, with seasonality putting pressure on full-year growth as well,” HSBC noted.

For most of the large companies, margins had seen a dip in FY17 and there is hardly any expectation of any significant turnaround during the fiscal, despite higher utilisation level and tighter control on costs. As the companies announce their results, the investor focus would also be on the commentary on spending by the financial services sector, progress in large deals, pricing pressure and the strides made in the digital space.