Dial into IT stocks

Last Updated: Fri, Jul 05, 2013 03:33 hrs

Indian information technology (IT) companies are expected to give a firm start to the new earnings season. The first quarter is traditionally strong for Indian IT. However, the rupee's sharp fall of nine per cent against the dollar in the first quarter and the ramp-up of new projects signed up earlier this year are expected to give a boost to revenues. Top-tier companies such as HCL Technologies and Tata Consultancy Services are expected to post an increase of around three per cent in revenues over the previous quarter, while others such as Wipro and Infosys could see muted growth of around one per cent.

A fall in the rupee generally helps boost margins. On average, a fall of one per cent in the rupee boosts margins by 30 basis points for some of the top-tier companies. But for the first quarter, margins will remain largely flat, as many of these companies have increased wages by three to seven per cent across the board. Besides, the rupee fell in a big way only in June; hence the bulk of the benefits will be visible in the next quarter. Over the next few months, analysts could also upgrade their earnings consensus by six to nine per cent.

Growth disparity among the top four players is expected to persist in the first quarter. TCS and HCL Technologies, for instance, have been investing in acquiring more big contracts. They are expected to pull ahead, with better growth rates of three to four per cent. They are also likely to point to a good demand environment and rising IT spends in the US.

TCS is expected to report strong growth in banking and retail. However, hikes in wages will result in flat margins. HCL is expected to deliver solid growth of four per cent, on the back of big deals won last year. The company could see a small improvement in margins on better ramp-ups in big deals and the falling rupee.

For Infosys, it's going to be a muted first quarter, as the company takes a hit due to salary hikes and rising promotion cost. Infosys could clock revenue growth of a little less than two per cent, though margins could shrink. Wipro has also been slow in winning new deals; therefore, its growth rate is expected to be muted, at around one per cent.

However, all eyes will be on the guidance for the full year and the demand outlook for IT services, especially after the new immigration Bill in the US, which will increase the costs for Indian IT companies. Overall, analysts are quite positive on the IT sector for the coming quarter but expect the gains from the rupee to be invested in getting new deals.

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