Margins to come under pressure for top IT companies in December 2013 quarter

MUMBAI: Tata Consultancy Services (TCS), India’s largest IT exporter, is expected to report 1.8% sequential increase in the topline and 6.5% jump in the net profit for the December 2013 quarter. HCL Technologies, the fourth biggest among the top-tier IT firms, is likely to show 2% sales increase and half a per cent drop in the net profit for the quarter by similar comparison.

The expectations are based on the average of the estimates by six brokerages and ETIG forecast. Both TCS and HCL Tech are slated to announce the third quarter numbers on Thursday, January 16.

Analysts expect the companies to report a sequential growth of over 3% in business volumes. It is likely to be substantially lower than the 7.3% growth seen for TCs and 3.6% for HCL Tech during the previous quarter. Seasonal weakness due to vacations and the initiation of the decision cycle to decide annual IT budget by clients in the West are the prime reasons of the expectation of a sequential drop in volumes.

Operating margins are expected to remain flat from the previous quarter given subdued volume growth and stable currency. The rupee remained more or less unchanged at 62.1 against the dollar on an average during the December quarter compared with the previous quarter.

This was unlike in the September quarter when a 10% sequential depreciation in the rupee had helped IT exporters boost profits and profitability. “Margins are likely to remain flattish sequentially with slight INR/USD appreciation likely offset by productivity.

HCL Tech margins are forecast to decline given annual wage hike to part of the employees,” noted Bank of America Merrill Lynch in a recent report.