TCS and Infosys to face least impact — Indian IT companies likely to report sharp decline in revenue during first quarter

TCS and Infosys to face least impact — Indian IT companies likely to report sharp decline in revenue during first quarter
Expectations for first quarter earnings from Indian IT services companiesBCCL/BI India

  • First quarter earnings for Indian IT service companies will show true impact of the coronavirus lockdown on revenue.
  • Tata Consultancy Services (TCS) and Infosys will bear the least impact with Tech Mahindra expected to be hit hardest.
  • Work from home and rupee depreciation may offset the impact on operating margins due to the fall in utilisation levels.
India IT services companies are gearing up to post their first-quarter results starting with Tata Consultancy Services today. Between the months of April through to June, the numbers are likely to be poor. Any recovery that can be expected will likely occur in the second quarter. The third and fourth quarters, for IT services companies, are seasonally weak.

CompanyExpected dip in revenue
HCL Technologies-6%
Tech Mahindra-7.5%
Source: Edelweiss Securities
Note: Revenue dip calculated in constant currency (CC) terms

The positive is that work from home has likely drummed down expenses and overhead costs that could help the operating margins with added boost from a weak rupee.

Since most of the companies export services, their billing in non-rupee currencies, primarily the dollar. Hence, a weak rupee may magnify the earnings.

"While a fall in utilisation levels and negative operating leverage should hurt margins, they should be partly offset by sharp rupee depreciation, the deferral of salary revisions, and the absence of certain general and administrative (G&A) or PM CARES fund-related expenses," said brokerage firm Motilal Oswal.

Sharp dip in revenues to be expected
The top five IT services companies — TCS, HCL Technologies, Infosys, Wipro and Tech Mahindra — are likely to post a 5% to 8% dip in their dollar revenues due to the impact of the coronavirus on them and their clients, according to CLSA’s report.

“We think the markets are still in a mood to overlook any misses given the continued macro uncertainty and even the lack of negative could trigger positive share reactions,” added Divya Nagarajan from global research and brokerage firm UBS, highlighting that it will still be a low-point for revenues although a gradual recovery can be expected in the second quarter.

Edelweiss Securities also believes that the coronavirus lockdown will have had a “severe impact” on IT services companies. “The lockdowns have limited new deal wins and will have a ripple effect on getting substantial growth back till FY21 end," it said in its report.

Annual guidance is unlikely to be on the cards. "Despite indications of improved demand visibility, we expect Infosys, HCL and L&T to wait for Q2FY21 to evaluate reinstating formal guidance," said CLSA.

Sector-wise impact
Most of the impact from the coronavirus pandemic will be borne by verticles like travel, transportation, energy, retails and manufacturing. Financial and life science vertices may provide some cushion, according to analysts.

Last quarter, management commentary from TCS indicated that certain businesses would likely face difficulty in making payments. This quarter, Days Sales Outstanding (DSO) — which represents the number of days it takes a company to collect its client payments — will be a key metric to watch for the troubled verticles.

During the upcoming earnings the brokerage firms recommend that investors should focus on the following aspects:

  • Look at order booking instead of the pipeline since it results the company’s portfolio strength and sale engine effectiveness.
  • Evaluate the exposure to discretionary spending by looking at the dip in revenue in ‘non-troubled verticles’.
  • Focus on the margin management drivers since cost-structure deflation would reflect long-term positive growth.
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