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IT cos revenue show to stay strong, but margins to take a hit

Profit margins at IT companies are likely to remain under pressure in the June quarter on a sequential basis due to higher wage costs, adverse forex movements and visa expenses. Brokerages expect 20-340 bps year-on-year decline in earnings before interest and tax (EBIT) for tier-1 IT companies.

Localisation and investments in digital capabilities would also hold down profitability. Concerns over slowing global growth and strengthening of the rupee are likely to weigh on IT stock performance and analysts expect moderate stock returns, in the near term.

“We expect EBIT margins across the top-tier to shrink by 50-160 bps, with contractions particularly pronounced at TCS, Infosys and Tech Mahindra” said Ashish Chopra, research analyst, Motilal Oswal Financial Services. “The situation is no different for tier-II, where barring Mphasis, Hexaware and Zen Technologies, we expect margins to contract by over 100 bps.”

Analysts anticipate revenue momentum to sustain in the June quarter earnings due to strong deal signings in the March 2019 quarter, but forex movements and operating expenditure may hit margins.

“We anticipate cross-currency headwinds of 20–25bps for the top-five Indian IT players…In the mid-cap space, while Hexaware, Persistent, L&T Infotech and L&T Technology Services are expected to post decent numbers, client-specific issues are likely to hamper Cyients and eClerxs ability to grow,” said Sandip Agarwal, analyst, Edelweiss.

However, most analysts said that demand across the board remains robust and this should reflect in strong deal wins and positive management commentaries.

Infosys and HCLT provided FY20 revenue growth guidance of 7.5-9.5 per cent and 14-16 per cent, respectively. Both companies cut EBIT margin guidance band by 100 bps each. TCS has guided for double-digit revenue growth at stable margins.

“The dollar appreciation against all major currencies in the June quarter will have a negative impact of 10-50bps on US$ revenue of Indian IT companies for the quarter,” said Rahul Jain, VP Research, Dolat Capital. “The wage hike cycle in many cases and increased visa costs for almost all the IT companies will further hit margins.”

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