Global macros may mute topline growth for IT firms

The third-quarter results season for the information technology sector will begin on Friday. The IT bellwether Infosys is all set to announce its December quarter results on Friday as Tata Consultancy Services (TCS) has delayed its results due to hearing in the Cyrus Mistry case in the Supreme Court.

The IT sector, overall, is likely to see moderate growth in topline, while their profits are likely to be muted.

Moreover, the results of a probe into the whistleblower allegations against Infosys CEO Salil Parekh conducted by law firm Amarchand Mangaldas is likely to be of interest to investors and analysts alike.

IT major TCS is yet to announce a date for its board meeting to consider the Q3 results.

According to a note by Sharekhan, revenue growth in the IT sector is likely to be impacted by weak tech spends by financial firms in the US and Europe, especially in capital markets and banking sectors and a delay in decision making for IT owing to macro uncertainties.

The note also says that the sluggishness in retail and auto segments and moderation in digital growth will impact the margins.

“Demand from global BFSI clients is expected to remain weak in the near-to-medium term, owing to weakness in capital markets and negative-yielding bonds across key developed markets (particularly in Europe). Moderation in spending by retail clients in Europe owing to slowing economic growth in Europe and Brexit is expected to impact the growth of Indian IT companies. We expect upcoming US elections and increased scrutiny of applications under the new visa rules would lead to delay in deal closures,” the brokerage firm said.

However, it states, “Despite these headwinds, the demand environment remains healthy, which is evident from the large deal momentum, robust deal pipeline and acceleration in core transformation works by large global enterprises. Operating profitability is expected to remain under pressure owing to elevated attrition, higher onsite expenses, transition costs in large deals, and intense competition.”

TCS is expected to report weak revenue growth with moderation in constant currency (CC) growth to 6.9% y-o-y owing to weakness in the BFSI and retail verticals and impact of furloughs. It also expects Infosys to upgrade its revenue growth guidance to 9.5%-10% from 9%-10%.”

It also estimates that TCS will see a growth of 2.7% in Year-on-Year profits while Infosys will see a 3.5% uptick in profits. Meanwhile, Brokerage firm Motilal Oswal in a note said, “In a seasonally soft quarter, higher-than-usual furloughs and caution in key verticals (BFSI, retail) will create further overhang on growth.”