What To Expect From IT In Q2FY13 Results?

Q1FY13 was a disappointing quarter when it came to IT results. It all started with industry body NASCCOM projecting an 11-14 per cent growth for FY13 as compared to the projected 16-18 per cent for FY12. The Big 4 of Indian IT (TCS, Congnizant, Infosys and Wipro) slowed down due to weak global economic cues, resulting in IT spending cuts across key geographies like U.S. and Europe and weakness in the key verticals like BFSI.

Moreover, changes in client behaviour, product needs, government mandates and technologies (with the disruption caused by social, mobile, analytics and cloud technologies) posed a larger challenge for companies to cope with and grow on. So while growth existed, companies had to be rightly positioned to capture it, that too in an economic environment that pressured margins to a large extent. A weighted average growth rate of the Big 4 showed an increase in the topline by 15.84 per cent but a decline in the bottomline by 1.58 per cent. However, a rupee depreciation of 10.20 per cent in the quarter resulted in good rupee term results.

Q2FY13 usually is a relatively stronger quarter for the IT industry. However, there has been no change in the global situation and we continue to see overall spending cuts and delayed decision making. Moreover, weakness continues to persist in key verticals like BFSI and there has been no significant improvement in the macro situation of the U.S. and Europe. Margins are likely to be pressured to a larger extent as the effect of wage raises would start getting realised. Increasing spending on visas and investments would also add to downward pressure.

What has changed from the previous quarter is the directional movement of the rupee. This though wouldn’t cause as dramatic a change as Q1FY13 in the financials of IT companies because:

1. The extent of movement of the rupee in Q2FY13 was lower as compared to Q1FY13. While the rupee depreciated by 10.20 per cent in Q1FY13, it appreciated by 5.95 per cent in Q2FY13.
2. Change in the average USD rate from Q4FY12 to Q1FY13 was 7.77 per cent while from Q1FY13 to Q2FY13 it was 1.89 per cent.

Though the extent of the effect would be lower, it still stands true that it would negatively affect financials.

Mid-caps remain in a relatively healthier position due to their business model that allows them to focus on specific industrial verticals to leverage expertise and thus see a proliferation of orders. Apart from this, these companies price their offerings relatively cheaper than large-caps. While the average operating profit margin for large-caps have been 27.04 per cent with Infosys as high as 32.19 per cent, mid-cap averages stand at 21.05 per cent.

On a cumulative of the above factors, the results are expected to be better than the previous quarter although they aren’t expected to cause outperformance to a large extent. Though the near term outlook of the industry doesn’t look too favourable, deal wins, pricing trends and managements’ outlook on margins, hiring and demand would give a clearer picture on the performance of the sector.