Q1 results of IT cos to disappoint markets

 Financial results for the first quarter of FY '14 are about to commence with Infosys announcing its performance on July 12 amidst analyst concerns that the sector will disappoint Street expectations for broadbased acceleration in revenue growth.

“During the quarter, the performance of Indian IT stocks was negatively impacted due to overhang in terms of the US Immigration Bill. The proposed immigration reforms in the US appear to have negative ramifications not only in terms of costs, but also with regard to revenues,” Angel Broking analyst Ankita Somani said.

She added that apart from increasing salaries for H1-B employees as well as increased charges for H1-B visas ($10,000 fees for every additional worker on visa over the 50 per cent limit), the proposed bill will necessitate increased local hiring by offshore technology companies. This could increase average onsite costs for many Indian offshore players as well as lead to reduced flexibility for their onsite workforces, unlike the past.

According to Kotak Institutional Equities Q1 of FY 2014 will be no different from the theme witnessed in the last four quarters – companies with execution momentum, viz. TCS and HCL, are expected to deliver a steady quarter with 3.1-3.5 per cent revenue growth in dollar terms.

“Turnaround themes will struggle with modest revenue growth of 0.8 per cent for Infosys and flat revenues for Wipro. Revenue growth will be impacted by 50-80 bps due to adverse cross-currency movement; TCS with 0.8 per cent, and Infosys and Wipro with 0.7 per cent, will be the worst hit.”

Analysts believe Indian IT companies stand to benefit on operating margins due to rupee depreciation, as generally every 1 per cent depreciation of the rupee leads to 30-40 basis points increase in margins of an IT company.

Somani expects the EBITDA margins of Infosys to grow 109 bps quarter-on-quarter (qoq) to 27.6 per cent, having fallen for five consecutive quarters. TCS is expected to post almost flat EBITDA margins sequentially (at 28.3 per cent) as currency gains will be absorbed by headwinds on account of wage hikes given out during the quarter.

HCL Tech is expected to report 92 bps qoq expansion in EBITDA margins to 23.3 per cent. Wipro's (IT services) margins are also expected to remain flat sequentially due to wage hikes by the company since June 1, 2013.