Information technology majors are expected to report strong revenue growth for the quarter ended September 30, or the second quarter (Q2) of 2018-19, according to analysts. The depreciating rupee would aid margins, they said.
According to estimates by multiple analysts, these firms are expected to post quarter-on-quarter (q-o-q) revenue growth of 0.5-4.5%, in constant currency terms. Constant currencies are exchange rates which eliminate fluctuations while calculating financial performance numbers.
“We expect overall constant currency revenue growth (2.9% q-o-q) for the top five IT companies to be better than the first quarter of 2019 fiscal year (2.5% q-o-q) and second quarter of the fiscal year 2018 (1.5% q-o-q), led by ramp-up of recent large deal wins, improving macro environment, and strong seasonality,” said brokerage Sharekhan, owned by BNP Paribas.
The value of the rupee has been declining against the US dollar, except for brief periods of consolidation and appreciation. It has depreciated by 9.5% year-on-year (y-o-y) and 4.5% during the last quarter alone.
The IT companies have been hedging their receivables—debts owed to a firm by its customers for goods/services rendered but not yet paid for—to ensure visibility of rupee revenues. Some of them have high expenses in dollars due to onshore presence. The hedge period varies between two and four quarters, depending on the company policy.
“On an average, 1% rupee depreciation against the dollar results in approximately 1.5- 3% increase in the bottom line for large IT companies,” Deepak Jasani, head-retail research, HDFC Securities told Fortune India. “But, the hedging losses take away from this benefit, at least initially.”
India’s largest IT services company, Tata Consultancy Services (TCS), will lead the growth in the sector, analysts say. On October 11, it will be the first IT major to announce the July-September or Q2 results.
In constant currency terms, net profit of TCS stood at ₹7, 340 crore, up from ₹5,945 crore y-o-y and ₹6,904 crore in the June quarter. Their revenue grew at 9.3% from a year earlier and 4.1% q-o-q, thereby surpassing industry body Nasscom’s sector growth projection of 7-9%.
Analysts see stable growth at TCS in this quarter.
IDBI Capital Markets expects TCS to post a 4.5% q-o-q revenue growth in Q2, in constant currency terms, led by ramp up of large deals and improvement in Ebit (earnings before interest and taxes) margin by 180 basis points due to rupee depreciation and lack of impact of a salary hike in the first quarter.
After TCS, India’s second largest IT firm, Infosys, is set to announce its financial results on October 16. The company had reported a 2.1% decline in q-o-q net profit at ₹3,612 crore for the quarter ended June 30, missing street expectations.
In Q2, IDBI Capital Markets forecasts a 3.1% q-o-q revenue growth for Infosys with a cross-currency headwind of 70 basis points. It expects Ebit margin to decline by 110 basis points q-o-q, benefitting from the rupee’s depreciation and revenue growth, partly offset by a salary increase for senior-level employees and investment in sales and marketing.
Research firm Prabhudas Lilladher expects Infosys to maintain its revenue growth forecast of 6-8% in constant currency for FY19. “Infosys has announced a slew of deals over the past few months and hence we expect continued confidence in revenue momentum,” the research firm said in a report.
Overall, it is a good second quarter for the IT sector. The S&P BSE IT index has continued to outperform the benchmark BSE Sensex in the past three months with a gain of 10.2% against a loss of 3.4% in case of the BSE Sensex. “The outperformance continues to be even higher on six-month, year-to-date and one-year basis,” said IDBI Securities.
Among the other IT services firms, HCL Technologies, Wipro, and Tech Mahindra are likely to report revenue growth at 3.5%, 2%, and 1.5%, respectively, IDBI Securities said.