Q4 Results Preview: IT Sector

The IT sector has had a volatile year, having braved a slowdown, erratic movements in the rupee, natural calamities and the direct effects of subdued global macroeconomic effects. In Q3FY13, the sector witnessed an average sequential growth of 3.76%. However, there was some pressure on the margins, the net profit margin having declined by an average of 34 basis points.

Q4 is a sequentially weak quarter because of budget closures. This is generally followed by heavy spending in the next two quarters. For the quarter, we expect the sector to show moderate topline growth on a sequential basis. At the same time, margin pressures are expected to continue.

Bellwether Infosys is expected to stage a decent topline performance. However, its bottomline is likely to be pressured as a result of wage hikes for onsite employees effective from January 1, 2013. Among other IT biggies, TCS and HCL Tech are expected to lead the pack with relatively faster growth while Wipro is expected to be unimpressive on the revenue front.

On the margins front, Tech Mahindra, Mahindra Satyam and Hexaware are expected to see significant sequential improvement. In the previous quarter, these three companies had witnessed a considerable decline in their net profits. While Tech Mahindra and Mahindra Satyam were hit by a one-time settlement charge, Hexaware faced a slowdown on account of a key client.

At the same time, we expect companies like MphasiS, Persistent and NIIT Tech to outperform the Indian IT firms. MphasiS is expected to outperform, although organic growth will continue to be hampered because of a slowdown from its major client, HP. However, the company will be largely benefited by the integration of a previous acquisition, Digital Risk.

Guidance for FY14 will be a key factor to look at in the Q4 results season. IT Research major Gartner has forecast a better outlook for IT spending in FY14. Companies are expected to project at least 10% growth for FY14.