With the broad-based slowdown in Banking, Financial services and Insurance (BFSI) and healthcare as well as delays in projects across many clients, Kotak Institutional Equities report says that the domestic IT sector is likely to see its weakest September quarter in the past eight years.
In the report, it is expected that large IT players will see revenue growth at 0.5-3 per cent during July-September quarter of 2016-17, in comparison to preceding quarter. It adds that, “Second quarter for the current fiscal will be the weakest September quarter for Indian IT in the past eight years.”
Infosys is expected to see the most revenue growth at 3 per cent followed by HCLT (2.6 per cent) TCS (2.4 per cent) and Wipro (0.5 per cent). “Infosys is our top pick in the sector while we like Tech Mahindra for inexpensive valuations. We are cautious on other names,” report said.
According to the report, slowdown in growth, the rupee’s strength and investments will lead to toning down of margin expectations by companies.
“Second quarter of 2016-17 will be the weakest September quarter for Indian IT in the past eight years. We expect tier-1 IT to report constant currency revenue growth rate of 0.5-3 per cent quarter-on-quarter. We forecast cross currency headwind of 50-100 bps for tier-1 IT due to depreciation of GBP,” it said, adding that the firm expects some cut in growth guidance.
Reliance Securities feels it is likely to be the weakest ever Q2 for Tata Consultancy Services (TCS) and Wipro in terms of sequential dollar revenue growth.
“Factors like SMAC (Social, Mobility, Analytics and Cloud), leading to revenue cannibalisation, challenging macro, high competitive intensity and pricing pressure will sustain and we expect these factors to impact growth over the next few quarters as well,” it added.
The July-September quarter has always been one of the better quarters for the $110-billion Indian IT sector, witnessing strong sequential revenue growth during the period.
“The seasonal strength that leads to strongest sequential growth in the September quarter is hardly expected to play out this time, as slowness in spending by the BFSI vertical weighs on the industry. In dollar terms, growth will be pegged back further by sharp depreciation of the GBP (pound) v/s the US dollar,” Motilal Oswal said in a report.
The current crisis may also affect the next financial year. The wider-reaching uncertainty resulting in longer decision cycle, the difficulty in getting large deals and the lower discretionary spending will hamper the growth.
The country’s largest software services player TCS has already warned that its financial sector clients in the US are holding back on discretionary spends, leading to a “sequential loss of momentum.”
Furthermore, Infosys has also hinted that it may slash its revenue guidance for the second time this fiscal, stung by “risks” like challenges in the banking and financial services sector and cancellation of projects.
But Nasscom has so far maintained that there is no immediate reason to revise the 10-12 per cent revenue growth forecast in IT exports for 2016-17.
“We see FY17 to remain a challenging year both on growth and margins,” Centrum said.