How will IT firms fare in Q4?

How will IT firms fare in Q4?

Last Updated: Thu, Mar 27, 2014 05:02 hrs
IT industry

The Street is familiar with the divergence in the performance of Tier-1 software services companies. But the fourth quarter will see both Tata Consultancy Services (TCS) and Infosys reporting softer growth, albeit for different reasons. So far, TCS has been leading the sector's growth. In the March quarter, it cited seasonality and sequential decline in the India business for its softer guidance, while Infosys gave the usual spiel on delayed ramp-ups and project cancellations.

The Street expects Infosys to end FY14 with 11.5-12 per cent dollar revenue growth, the lower end of its guidance. Infosys is likely to report a sequential decline in dollar revenues, while TCS is expected to exit FY14 with a year-on-year dollar revenue growth of 16 per cent and a sequential one of two per cent.

However, all Tier-I players won't report softer growth rates. Wipro, Tech Mahindra and HCL Technologies are on course to lead the sector's growth in the fourth quarter. Nomura's Ashwin Mehta and Pinku Pappan believe HCL Tech, TechM and Wipro could report a quarter-on-quarter dollar revenue growth of three per cent or higher in the fourth quarter, much better than Infosys or TCS. Over the past few years, the mid-cap IT companies have fared better as the larger firms struggled. Barring FY11, Tier-II companies have outperformed Tier-I firms as far as growth is concerned. But analysts believe the growth rates of both are converging as deals have become more complex. According to Centrum Capital, Tier-1 is expected to match or exceed Tier-2 growth over FY15-FY16.

According to consensus estimates, Tech Mahindra is expected to report a 142 per cent jump in dollar revenues in FY14. HCL Tech is expected to exit FY14 with a dollar revenue growth of 17 per cent.

Business growth prospects are looking good this quarter; so is the outlook on margins. Compared to last year, Tier-I firms are set to report an improvement in operating margins. Sequentially, there may be some impact due to the rupee's recent appreciation, but most companies have indicated stable margin environment. Most brokerages are positive on the sector as growth will now drive the valuations. With growth of both Tier-I and Tier-II now converging, complex capabilities would be required for further growth. Growth will also be aided by macro-economic improvements in the US and deal wins in Europe.

Bloomberg Estimates ( $ Million)
  Sales Net Income OPM(%)   Operating Profit
Fiscal FY13 FY14E %chg FY13 FY14E % chg FY13 FY14E FY13 FY14E
TCS 11583 13482 16.39 2564 3098 20.83 26.93 29.28 3119 3947
Infosys 7420 8311 12.01 1732 1750 1.04 25.89 24.64 1921 2048
TechM 1264 3070 142.88 236.81 471.46 99.09 18.23 20.35 230.37 624.83
HCL Tech 4666 5465 17.12 736.97 993.98 34.87 19.69 23.95 918.54 1309
Wipro 6930 7150 3.17 1220 1264 3.61 17.39 20.24 1205 1447
Quarter Ended
  Q3FY14 Q4FY14E % chg Q3FY14 Q4FY14E   Q3FY13 Q4FY14E Q3FY14 Q4FY14E
TCS 3434 3560 3.67 857.04 853.20 -0.45 29.76 27.93 1022 994.41
Infosys 2101 2153 2.48 463.67 463.74 0.01 25.02 24.72 525.60 532.21
TechM 790.03 802.26 1.55 162.86 112.48 -30.94 20.35 23.00 160.74 184.54
HCL Tech 1320 1364 3.33 241.27 249.89 3.57 23.72 22.22 313.04 303.08
Wipro 1827 1892 3.56 324.93 350.51 7.87 20.14 20.62 367.94 390.20

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