Barclays sees possibility of guidance adjustment for IT cos in Q3; Infosys, TCS top bets

NEW DELHI: Sharp movements in currencies should adversely impact the US$ revenue growth of Indian IT companies in the Dec-14 quarter, global investment bank Barclays said in a report on Wednesday.

This could limit the QoQ revenue growth of the top companies such as Infosys, TCS and Wipro to 0.6-0.9% QoQ (US$ terms). Barclays also expects Infosys to adjust its full year guidance to 6.5-7.5% US$ revenue growth, to compensate for the currency moves.

The global investment bank believes that the key focus areas will be a) the demand environment given weakness in Europe and muted mid-quarter commentary by TCS, b) any further evidence of a successful turnaround by Infosys and c) signs of strength in Tech Mahindra’s non-telecom business.

Barclays is overweight on TCS and Infosys, which are also its top picks in the IT space.

Expectations of top stocks from the IT space for Q3:

TCS: Barclays expects TCS to deliver 0.6 per cent QoQ USD revenue growth in Q3FY15. At its quarterly analyst meeting, the management had highlighted that 3QFY15 revenue growth would be weaker than 2Q, led by project furloughs in retail, manufacturing and hi-tech verticals; continued weakness in the insurance vertical and muted performance of the banking products offering.

Furthermore, cross currency fluctuations are likely to impact US$ revenue growth by 220bps in the Dec-14 quarter. Management also noted that there would be a marginal impact of rupee depreciation on EBIT margins (10-20bps) in 3QFY15.

Infosys: The global investment bank expects USD revenues to increase by 0.8% QoQ (vs. the 1.4-3.8% guidance band; adverse cross currency movement could result in revision of the USD revenue guidance, constant currency guidance will likely remain same) with its EBIT remaining flattish QoQ.

The key investor focus however will likely be on management commentary on 1) TCV of large deal wins and 2) progress of new initiatives such as sales force training and use of automation and AI to increase client relevance.

HCL Technologies Ltd: Barclays expects 0.9 per cent sequential revenue growth, led by strength in infra services with margins declining 130bp q/q, led by a wage hike impact.

Wipro Ltd: Wipro’ IT services revenue growth was likely 0.7 per cent QoQ in USD terms (US$1,784mn), due to negative cross currency impact (management guidance for 3QFY15 is US$1,770-1,810mn).

Tech Mahindra Ltd: Barclays estimate Tech Mahindra will deliver USD growth of 3 per cent QoQ (1.8% QoQ organic, impact of Mahindra Engineering Services merger will be 1.3%) with its EBIT margin remaining flattish.

Mindtree Ltd: Barclays expects Mindtree to deliver 0.6 per cent QoQ revenue growth in 3QFY15, in-line with management commentary that 3Q revenue growth would be marginal. EBIT margin will likely increase by c30bps as currency deprecation will offset the impact of wage hikes.

Mphasis Ltd: Barclays expects Mphasis to deliver 0.5 per cent US$ revenue growth for the Dec-14 quarter along with flattish margins due to the impact of the slowdown in Digital Risk and decline in HP revenues.