Over the past few quarters, Infosys has struggled to beat Street estimates, and this has had a significant effect on stock prices. IT stocks underperformed the broader markets in the September quarter, with the BSE IT index gaining just 3 per cent against the BSE Sensex, which rose 7.5 per cent over the same period. A major reason for the underperformance was Infosys, which has the highest weightage on the benchmark index.
In the three months to September, Infosys shares have been flat, rising a little over 1 per cent. Shares in TCS, India's biggest IT outsourcer, also did not perform, despite the company reporting strong numbers. Shares in Wipro have declined 5 per cent in Q2. The exception among tier I companies has been HCL Tech, whose shares have gained over 20 per cent in the second quarter on the back of strong earnings in the June quarter.
Second quarter is seasonally strong for software service providers, but the prolonged economic weakness in US and Europe, which contribute over three-fourths to the revenues of top IT firms, may impact sales.
Here's how big IT firms are likely to perform in the second quarter:
1) Revenue growth: Most brokerage firms expect tier 1 IT players to report 2-4 per cent sequential growth in dollar revenue, largely driven by volume traction. Pricing pressure likely continued in the second quarter. TCS is likely to lead revenue growth and Wipro is likely to lag the tier one pack.
2) Margins: A 5 per cent depreciation in the Indian rupee during the September quarter may lead to expansion in margins. However, Wipro and HCL Tech will be impacted by wage hikes implemented in the second quarter. If Infosys announces a wage hike, it's margins will be impacted for the second half of fiscal 2013.
3) Guidance: Infosys has stopped giving quarterly guidance from the June quarter. It may raise its annual guidance after the acquisition of Swiss consultancy firm Lodestone. Wipro is likely to meet the upper end of its quarterly guidance, but guidance for the December quarter may be flat. TCS had earlier said it will better Nasscom's projection of 11-14 per cent annual growth.
4) Other factors: The banking, financial services, and insurance verticals may have slowed down because of economic weakness in US and Europe. BFSI contributes over one third to Infosys' overall revenues. Discretionary spends likely remained weak affecting Infosys more than other IT firms. Last week CLSA's sales team said Indian IT services companies are aggressively going after big contracts, which have adversely affected billing rates. Visa issues, ahead of the US elections, may be another headwind that may impact IT firms.
5) What brokerage says: Most brokerages continue to bet on TCS and HCL Tech. Barclays has an "equal weight" on Infosys and TCS, an "underweight" on Wipro, and an "overweight" on HCL Tech.