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IT sector preview: TCS to kick off earnings season on Thursday; what to watch out for

A report by Edelweiss Securities estimates that the top five Indian IT players - TCS, Infosys, Tech Mahindra, HCL Tech and Wipro - will report organic revenue growth of 1.9-3.5 per cent quarter-on-quarter in constant currency (cc) terms

Rukmini Rao        Last Updated: October 7, 2019  | 14:23 IST
IT sector preview: TCS to kick off earnings season on Thursday; what to watch out for

Tata Consultancy Services (TCS), country's largest software services firm, will kickstart the earnings season for the September quarter of financial year 2019/20 on Thursday. Coming in the backdrop of a mixed set of results in the June quarter, analysts don't expect Q2FY20 to be any different. In the IT sector, large-cap companies such as Infosys and TCS are expected to report steady growth, while midcap companies such as Tech Mahindra, HCL Tech and Mphasis are expected to stand out in Q2FY20.

A report by Edelweiss Securities estimates that the top five Indian IT players - TCS, Infosys, Tech Mahindra, HCL Tech and Wipro - will report organic revenue growth of 1.9-3.5 per cent quarter-on-quarter in constant currency (cc) terms. Revenue growth is expected to be mixed, driven largely by seasonal performance and client specific challenges. However, profitability is likely to remain a key concern for most companies. A report by Kotak Institutional Equities points out that Tier-I IT companies could see a sequential increase in EBIT margins by 50-190 basis points due to headwinds from lower visa cost and benefits from rupee depreciation. On a year-on-year basis, the margins could see a decline anywhere between 80-340 bps. Analysts expect lower profitability largely due to several factors such as continued increase in subcontracting costs and higher localisation costs coupled with enhanced investments in digital business and re-skilling.

A few companies could see the additional cost impact dud to initial costs when entering into large deals. Here is what to watch out from the management commentaries of IT companies:

TCS

  1. Macro environment spends by retail clients and manufacturing demand in North America and Europe
  2. Demand in BFSI vertical, especially the capital markets segment
  3. Order pipeline and whether it will be sufficient to hit double-digit growth
  4. Impact of talent crunch in the US on margins and emphasis on subcontractor costs and localisation

Infosys

  1. Digital growth rates, BFSI and initiatives to manage attrition
  2. Guidance revision (8.5-10 per cent) on the back of strong large deal momentum
  3. Sustenance of large deal momentum and levers to defend margins
  4. Margin impact from localisation and benefits from the recent corporate tax rate cut

Wipro

  1. Demand outlook in the energy and utilities and financial services verticals
  2. Commentary on digital business and large deal wins
  3. Sustainability of margins in light of muted growth
  4. Benefits from cut in corporate tax rate by the Indian government

HCL Tech

  1. Update on plans for the products and platform business, especially the recent one of select products of IBM
  2. M&A strategy on the digital front and digital revenue growth
  3. Cash utilisation and capital allocation going forward
  4. Impact of the recent corporate tax cut

Tech Mahindra

  1. Margin implication of the recently signed large deal with AT&T and margin outlook
  2. Large deal pipeline and capital allocation policy
  3. Telecom sector outlook; 5G rollout and investments
  4. Measures for margin expansion

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