Strong growth expected for IT cos in Q2: Analysts

Mumbai: Big IT firms such as TCS, Infosys and Wipro are expected to announce strong earnings for the July- September quarter, helped by a steep decline of the rupee against the US dollar and improved demand for outsourcing services, say analysts.

They also expect strong volume growth for companies, supported by the improving demand scenario.

"Volumes for the top 4 companies are expected to rise by 2.5-4 percent, organically. Margins are expected to improve quarter-on-quarter, largely on the back of rupee depreciation. This is despite salary increments (in select cases)," Kotak Securities Head of Private Client Group Research Dipen Shah said in a report.

Infosys will kick-off the quarterly earnings seasons on October 11, followed by Tata Consultancy Services on October 15 and HCL Technologies on October 17. Wipro is yet to announce the date for second quarter financial results.

The July-September quarter has been volatile, with the rupee depreciating about 11 percent Q-o-Q against the dollar, on an average basis.

According to analysts, while 1 percent drop in exchange rate boosts operating margins of top exporters by over 30-35 basis points, the extent of benefit depends upon the companies' hedging policies.

A report by Angel Broking said the revenue growth in rupee terms is expected to be in the range of 13.5-16.5 percent Q-o-Q for tier-I IT companies.

IDBI Capital said in its results preview: "We expect volume growth to pick up in Q2 against the backdrop of modest acceleration in US economy along with improvement in decision making cycle.
We forecast 2.2-5 percent US dollar revenue growth for Top-5 IT companies in Q2."

Traditionally, Q2 is good for IT companies because of the strong budget flush that happens before close of the annual capex cycle by clients. IT companies are expected to witness budget flush from clients on discretionary, operational and capital spending.

"For tier-II companies, we expect volume growth to be modest at 2.0-5.5 percent Q-o-Q...Dollar revenue growth is expected to be 1.5-5 percent Q-o-Q," Angel Broking said.

It added that with the rupee depreciating sharply against the dollar, IT companies are expected to deploy the gains towards sales and marketing, mitigation of impact of the Immigration bill and investments in new service lines.

TCS is expected to lead the tier-I pack with 4.3 percent Q-o-Q dollar revenue growth, while Infosys is also likely to see a good quarter with 4.1 percent Q-o-Q revenue growth, Kotak Institutional Equities said in its quarterly technology report.

PTI