Bengaluru IT majors to maintain steady Q2 growth: analysts

India’s largest software services company, Tata Consultancy Services (TCS), is seen as the bellwether of the IT industry. So, when it kicked off the second-quarter earnings season with a strong set of numbers this week, it set a positive tone for the rest of the sector.

Mumbai-headquartered TCS on Thursday reported a 3.7% increase in revenue in July-September over the previous three months in constant currency terms. It also signalled ending FY19 with double-digit growth in revenue if it could sustain its current rate of growth.

All eyes are now on Infosys and Wipro to maintain the pace that TCS has set. Many brokerage houses expect top-tier Indian IT firms including Infosys, Wipro, and Delhi-headquartered HCL Technologies to continue the strong growth streak, backed by a slew of large-size deals during the July-September quarter, an improving macro outlook in most developed countries, and a surge in digital business.

Analysts expect Infosys to post revenue 3% growth quarter-on-quarter in constant currency terms, while Wipro is expected to report revenue growth of a little over 2% in constant currency. Wipro, which provides only quarterly growth forecasts, expects its July-September revenue to grow between 0.3% and 2.3% in constant currency.

In an export-heavy Indian IT-services industry, quarter-on-quarter comparison has become a critical parameter in recent times due to highly volatile global markets impacting growth figures.

IT companies use the constant currency method to eliminate the effects of exchange rate fluctuations while calculating financial results. Infosys will announce its results on October 16 and Wipro on October 24.

Phillip Capital said in a research report that the FY19 guidance by Infosys and HCL Technologies, and next quarter guidance by Wipro will be the key metrics to watch out for. It expects Infosys to maintain its revenue growth guidance of 6-8% in constant currency terms in FY19.

Typically, July to September is a seasonally strong quarter for the export-heavy Indian software-services industry as client budgets for IT spends start to ramp up.

However, in terms of performance, the Bengaluru-based IT majors pale in comparison to larger rival TCS. Over the years, TCS has managed to widen its gap with Infosys and Wipro in terms of revenue growth and profitability. For the June quarter of the current fiscal, Infosys posted a net profit of Rs 3,612 crore on revenue of Rs 19,128 crore, compared to TCS, which recorded a net profit of Rs 7,340 crore on revenue of Rs 34,261 crore. In comparison, Wipro’s profit stood at Rs 2,094 crore and revenue at Rs 13,977 crore on consolidated basis.

Interestingly, brokerage house Sharekhan’s research report points out that despite a spate of top-level exits at Infosys in the last one year -- including the resignation of its chief financial officer, M.D. Ranganath in August, under the new leadership (CEO, Salil Parekh) -- the company has been focussing on accelerating large deal wins, adding large clients and boosting its digital business. “Given the ramp up of large deals, healthy deal pipelines and improving demand environment in the U.S [the company’s largest market], we expect Infosys’ revenue growth to accelerate in the coming years,” the report added.

In a seasonally strong quarter, analysts expects broad-base growth for the large IT players across business verticals and a healthy growth turnaround in the banking and financial services space, especially in the U.S. Brokerage houses tracking the sector say attention will be focused on client budgets for IT spends as exports to the U.S. contribute over 60% of the revenue of the over $154-billion Indian IT outsourcing industry.