Cognizant: Information technology sector may see muted Q3

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BENGALURU: Third-quarter results at Indian information technology companies are expected to be a muted affair as seasonal slowness is exacerbated by low demand in the sector’s largest business verticals — banking and retail.

The banking and financial services sector — which accounts for the largest chunk of Indian IT revenues – has seen slow growth for nearly a year now as the largest lenders held back their spending or moved parts of it in-house. Retail, the second-largest vertical, has seen a slew of bankruptcies amid a struggle to compete with ecommerce giants like Amazon and Flipkart.

“We expect demand to continue to remain soft in 3Q results with companies seeing problems in clients and verticals. December 2017 will be a seasonally weak quarter with CC (constant currency) QoQ (quarter on quarter) growth of 1%-2.6% lead by HCL Tech and lagged by TCS (Tata Consultancy Services),” Ankur Rudra, analyst with foreign brokerage CLSA, said in a note. Rudra added that the brokerage’s channel checks show that demand remains weak in banks, retail and telecom but that it had improved in insurance, manufacturing, energy and healthcare.

IT

A result of the slowness in banking and retail means Indian IT companies will also face slower growth in North America, their largest market. Europe is expected to grow faster. IT companies are already looking at investing heavily to diversify. Last month, ET reported that Cognizant expects revenue from Asia to cross $1 billion as it powers ahead with investments in Australia and Japan and plans to look into China.

Analyst expectations for TCS’ sequential revenue growth are at 1-1.5% in constant-currency terms. Infosys is expected to grow at 0.9-1.2%, Wipro is expected to grow 0.8-1.2%. HCL Technologies and Tech Mahindra lead growth estimates. HCL Tech is predicted to grow 2.2-2.6%, while Tech Mahindra is expected to grow 1.8-2.2%. The slow growth will also hurt chances of margin expansion. Indian IT companies are facing higher costs now due to their need to hire people onsite and are attempting to offset those by lowering costs at home. Last quarter, most Indian IT firms saw their headcount fall.

“We expect margins to be broadly stable as seasonal weakness will offset cost savings, automation and pyramid rationalisation initiatives,” said Sandip Agarwal, analyst with brokerage Edelweiss.

The companies are also expected to spell out how they will be impacted by changes to US tax policy and the tightening of visa rules. Though companies have made progress in boosting hiring onshore, they remain dependent on visas. The policy overhang is expected to continue.

“The BEAT clause in the US tax bill has created uncertainty around companies operating under the subsidiary model with material transfer pricing (TCS, HCLT, CTSH and captives). Also, the H.R.170 bill that primarily affects H-1B dependent companies passed the House Judiciary Committee in November – it defines dependent companies as those where H-1B workers account for more than 20% of the workforce,” brokerage Motilal Oswal said.

The slow Q3 season will also continue into the next financial year, according to analysts who continue to expect singledigit growth.

“Given the vertical and macro-related uncertainties over FY18-20E, we remain negative on the sector and expect soft growth – 6-9% (US$),” said Sudheer Guntupalli, analyst with brokerage Ambit.



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