Results Preview | Sector: Technology
2016 Results Preview | Sector: Technology
No fireworks this season
Brexit and impending US elections keep expectations muted
Expectations laid low by macro and company-specific warnings
The seasonal strength that leads to strongest sequential growth in the September
quarter is hardly expected to play out this time, as slowness in spending by the BFSI
vertical weighs on the industry. In dollar terms, growth will be pegged back further
by sharp depreciation of the GBP v/s the USD (-8.5% QoQ). Hopes of a positive
surprise are laid low by commentaries from some companies:
TCS cited that weakness in discretionary spending in US BFSI is likely to cause
sequential loss of momentum.
INFO suffered termination of a contract with RBS’ standalone UK bank, Williams
& Glyn (W&G), leading to gradual ramp down of as many as 3,000 employees.
MTCL cited expectation of sequential revenue decline in USD terms and lower
profitability due to cross-currency movements, delayed ramp-ups, project
cancellations and weakness in Bluefin.
Tepid constant currency growth marred further by GBP
Against the above backdrop, we see top-tier growth in constant currency
ranging from 0.1% to 3.1% QoQ and from 6.1% to 12.7% YoY.
In USD terms (including the impact from GBP depreciation and other
currencies), we expect growth of -0.5% to 2.5% QoQ and 4.6% to 11.5% YoY.
While TECHM may lead sequential growth at 3.1% CC, that would be from
contribution from three acquisitions (Target – 1 month, Pininfarina – 2 months
and Bio – 3 months), excluding which organic growth would be 1.5% QoQ CC.
Margins may follow revenues amid missing currency tailwind
While the GBP depreciated v/s the USD QoQ, the INR was flat QoQ. Amid softening
of revenue growth in the recent years, the industry’s profitability has held up,
thanks to significant depreciation of the INR. However, continued deceleration of
revenue growth, combined with investments necessary to transition to Digital have
weighed on margins. Normally, strong 2Q growth comes to the aid of margins, but
this quarter we see sequential movements ranging from -160bp to 30bp for tier-I
(wage hikes taking toll on HCLT the most) and from -130bp to 70bp for tier-II.
Estimate cuts not behind us, yet; watch for INFO’s guidance, TCS’ BFSI outlook
We believe there is room for estimates to moderate further, given the ask rates
implied in the current FY17 revenue estimates. This is especially given that the
seasonal weakness of 2H will be further exacerbated by current sluggish macro
and the US elections in November. To that extent, watch out for commentaries
suggesting any offsets from ramp-ups in large deals that have been delayed,
causing some growth impediment in recent quarters.
Watch out for the extent of cut in INFO’s guidance, along with commentary
from TCS on the expected impact from current BFSI spending in 2HFY17.
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
(Sagar.Lele@MotilalOswal.com); +91 22 3982 5585
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
Bloomberg, Thomson Reuters, Factset and S&P Capital.
Please refer our report dated
20 Sep 2016