HCL Tech and Tech Mahindra may post better earnings as Euro bank crisis affects Infosys, Wipro

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HCL Tech and Tech Mahindra may post better earnings as Euro bank crisis affects Infosys, Wipro
Bombay stock exchange buildingBCCL

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  • The third quarter of the financial year is seasonally weak for IT companies.
  • The depreciation of the rupee will help margins but will be offset by wage hikes.
  • Growth in banking, financial services and insurance (BFSI) will continue to struggle as European banks remain weak and the US capital market is affected by tensions with Iran.
The third quarter of the financial year is seasonally weak for IT companies, for some more than others. The depreciation of the rupee, however, might offer the much-needed cushion profit margins

"Cross-currency movements were positive this quarter, mainly due to the strengthening GBP," says Harit Shah, an analyst with India Nivesh.

In some cases, it might be offset by the loss of productivity during strikes; and employee costs.

"Within the sector, tier-1 IT companies will deliver over 1.6% quarterly growth (7.5% annual) and tier-2 companies are expected to post over 2% quarterly growth or around 8% annually," predicts a report by HDFC Securities.

This financial year has been one of transformation for IT giants as they chose to re-skill their employees. HCL Technologies and Wipro are cementing their business overseas with localisation and near-shore services. In addition to geographic expansion, they have also increased their platforms and partnerships to expand their respective portfolios.
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However, 'localisation' has costs and clients are turning tight-fisted in the midst of the global economic slowdown — adding extra pressure. However, what IT companies do not lack is demand.

"We expect a steady 2020 as reflected in strong deal pipelines and continuity in large deal wins (TCS-Phoenix, INFY-Telenet, Siemens, Arlanxeo, Wipro-Olympus) and stable outlook/guidance increase by Accenture," said HDFC Securities report.

European banks remain weak
One of the core businesses that outsource are European banks and their finances continue to be weak.

Nearly one-third of the IT sector's revenue comes from banking, financial services, and insurance (BFSI). This might impact the growth of Infosys and Wipro.

"Growth outlook for the BFSI vertical, especially when the capital market (US) and large banks (Europe) are slowing within BFSI," remarks HDFC.
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The size of deals that IT companies might win could also shrink, due to Brexit. However, overall deal wins are likely to remain healthy.

In addition, favourable cross-currency movements should boost revenue growth. "TCS and Tech Mahindra are likely to see the maximum impact owing to higher GBP billing exposure as compared to peers," predicts Shah.

Single-digit growth
All in all, most tech companies are expected to post single-digit growth in the third quarter. Out of the pack, HCL Technologies might turn out to be the biggest winner.

"HCL Tech is expected to post strong growth of 4.6% quarter-on-quarter (QoQ) in dollar terms. The growth is expected to primarily come from HCL software and ramp-up of deals won in 2QFY20," predicts Niharika Ojha, an analyst at Narnolia.

However, India Nivesh believes Tech Mahindra might come out on top. "Tech Mahindra is likely to lead the pack with 3.7% concurrent revenue growth, aided by the ramp-up of the AT&T deal," predicts Shah.
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Infosys — bogged down by whistleblower allegations and speculation of insider trading — is expected to post a moderate quarterly growth of 1.9%.


CompanyExpected QoQ growth
Tata Elxsi5.30%
HCL Tech4.60%
L&T Infotech3.40%
Mphasis2.50%
Mindtree2.20%
Tech M2.10%
Persistent2%
Wipro2%
Infosys1.90%
Mastek1.20%
TCS1.10%
L&T Tech1.10%
Source: India Equity Analysis, Narnolia Financial Advisors

See also:
US - Iran tensions strengthen dollar giving boost to Indian tech stocks

Benching, firing and re-deploying — the story of 20,000 employees at tech majors

There is a big market developing for Indian IT companies at home
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