IT Sector Results Preview For Q3FY13

The December quarter is a relatively slower quarter for the IT sector. The holiday season directly affects billing owing to the lesser number of days in operation. Q3 of FY13 continued to be affected by subdued global macroeconomic trends taking a toll on IT spending and delayed decision making. In Q3FY13, the BSE IT index declined by 4.03%, even as the Sensex rose by 3.54%.

A slowdown was indicated by a number of factors right through the year. In the beginning of the year, Infosys had given a hiring guidance of 35000 employees for FY13. In November 2012, it said that it would delay the hiring of 17000 new recruits by 3 months in an attempt to cut costs and aid smooth steering through a difficult IT environment. However, this move seems to be facing further delays and the recruitment of the 17000 staffers could shift to the first half of FY14.

The markets reacted negatively to Cognizant’s SEC filing which included the performance incentive programme for 2013. It indicated that employees would get 100% of the performance units if it achieves revenues of USD 8.52 billion. This has been perceived as a translation of a revenue growth estimate of 16% for 2013 (versus 30.41% average yearly growth in the last 5 years).

TCS too indicated weakness in their outlook through an analyst meet recently. Seasonal weakness of the quarter and an effect of furloughs were put forth as reasons for concerns on the near-term outlook and pressure on margins.

Midcaps had been performing well so far due to vertical specialisation and their ability to adjust pricing. However, pressures on the topline and bottomline seem to be on the way in this quarter. Also affecting their performance has been the client concentration. Hexaware Technologies had issued a guidance of USD 94.7 million to USD 96.5 million for the quarter ending December 31, 2012. Towards the end of the quarter, this was revised to USD 92 million thus estimating a decline of 0.86% in revenues instead of the earlier estimated sequential growth of 2.05-3.99%. This downward revision resulted out of, as quoted by the company, certain unforeseen changes to a project plan in a large engagement for a customer and impact of USD 450k on account of Hurricane Sandy.

Apart from the above reasons, the bottomline would take a further hit due to the movement in the rupee. In Q3FY13, the average currency conversion was at Rs 54.14 to the dollar compared to Rs 55.25 per dollar in Q2FY13. The rupee has appreciated by 3.64% and this will bring to halt the currency depreciation benefits that companies were witnessing. However, results would differ based on the hedging policy adopted by companies.

We thus expect results of IT companies to be slow on the topline and pressured on the bottomline. At the same time, we expect relative outperformance by companies like HCL Tech, Persistent Systems and Tech Mahindra as a result of their better positioning, business model and inorganic growth.

Performance of BSE IT versus Sensex in Q3FY13

Note: BSE IT and Sensex rebased to 1