India’s top two software-services companies, TCS and Infosys, are set to announce their third-quarter earnings this week, but stakeholders and market experts are more likely to focus on their business outlook for the coming quarters than the results.
Brokerage houses tracking the sector say attention will be on the trends in client budget for IT spends for the calendar year as exports to the U.S. contribute over 60% of the revenue of the $150-billion-plus Indian information technology (IT) industry. This, they say, could be a sign of what is in store for the IT industry in 2018.
“While finalisation may still take some time, clarity on the likely direction of spend is a focus area,” says Harit Shah, research analyst at Reliance Securities. “The key banking, financial services and insurance (BFSI), and retail verticals will be watched. Apart from this, the potential impact of the recent U.S. tax changes is also likely to be another focus area.”
Another major concern is the change in the H1B visa rules proposed by President Donald Trump’s administration, which could severely affect the several thousands of Indian IT workers in the U.S., possibly even forcing many to leave the country. However, on Wednesday, the U.S. Citizenship and Immigration Services (USCIS) issued a notice staying any possible revisions to the rules.
Traditionally, the quarter from October to December has been the weakest for the IT industry owing to lower billing days on account of the holidays in the U.S. and Europe, the largest markets for the Indian IT companies. “Seasonality will sit on top of a fairly muted year for Indian IT, weighing on the sector’s revenue performance in the third quarter of FY18,” noted a Motilal Oswal report.
Brokerage houses expect the top-tier Indian IT companies to post sequential dollar-revenue growth in the range of 0.8% to 3%.
TCS, the largest Indian IT-services company, will be the first to announce its result on January 11. “We estimate TCS to post revenue growth of mere 0.7% in dollar terms,” say Sandip Agarwal and Pranav Kshatriya, analysts with Edelweiss Financial, adding that margin could contract 30 basis points (bps) quarter-on-quarter due to muted revenue growth. “We expect muted growth in Q3FY18 due to seasonal furloughs and sustained softness in BFSI and retail.”
Furloughs are involuntary time off from work without pay. In the outsourcing industry, typically at a client site, the employer places an employee on a non-duty, non-pay status temporarily due to lack of work or budget issues.
Analysts at Edelweiss Financial say the statements from the TCS management on demand outlook and client budgets in key verticals of BFSI and retail would provide a better understanding of the company.
Over the last several quarters, Mumbai-headquartered TCS has been under pressure, with earnings failing to cheer the market. Analysts feel that the underperformance of the firm over a prolonged period is largely due to weak performance in the U.S., and sluggish demand from clients in the BFSI space, the largest vertical for TCS, which together with retail contributes 57% of the company’s overall revenue.
Bengaluru-headquartered Infosys announces its results a day later on January 12. The company only early this month appointed Salil Parekh as its new CEO. An Edelweiss Financial report says “his strategy and vision to drive the company out of challenges will be key”.
“We estimate Infosys to post 1.4% quarter-on-quarter growth in dollar terms. We estimate the company’s operating margin to contract 50 bps sequentially on account of wage hikes for mid-level and onsite employees and ramping up of US workforce,” the report noted.
However, despite the management changes at Infosys, analysts do not expect any major change in the guidance for FY18.