BackIT companies’ revenue may drop up to 8% in June quarter
Analysts will watch out for pricing pressure, outsourcing revenue, BFSI and pharma and healthcare performance for signs of distressFurther, commentary will be awaited on the impact and workaround strategies for the current H1B visa restrictions
PremiumMUMBAI : The Indian IT sector is expected to report the full impact of coronavirus on business and client concerns in the first quarter earnings of FY21. The revenue of the companies may drop between 4% and 8%, depending on their exposure to troubled sectors like retail, aviation and hospitality among others.
Analysts will watch out for pricing pressure, outsourcing revenue, BFSI and pharma and healthcare performance for signs of distress.
According to a report by Emkay Global, Tier-I companies like TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra are expected to report a 4-6% sequential dollar revenue decline, while Tier-II companies may report a 4.5-8.1% fall in the April-June quarter. EBIT margins will fall sequentially, but the impact may be limited by currency depreciation and tight costs controls, the report said.
“We are largely expecting Q1 to be the rock bottom. Almost 75% of the IT clients have remained stable across sectors like BFSI, utilities, healthcare and communications. These areas are likely to witness a 3.5 to 4% revenue decline. The remaining 25% of IT revenues across retail, transport, hospitality and aerospace will experience revenue decline in the range of 10-15%," said Amit Chandra, IT Sector analyst, HDFC Securities.
Retailers that TCS or HCL have exposure to were lesser impacted by the pandemic than those Wipro was exposed to. Even across sectors, the nature of investments or projects will define the impact of covid-19. Midcaps with exposure to ER&D and manufacturing like LTTS, Sonata Software and Tata Elxi are likely to report more challenges due to the on-site nature of their work. What is more important is for companies to guide whether the impact ends in Q1 or continues further, said Chandra.
Revenue decline will be offset by cost optimization across travel costs (150 basis points), currency appreciation (100 basis points) and absence of wage hikes (120 basis points) which is going to protect margins against a sharp decline, analysts said.
"With sectors like retail- apparel and department stores- and aerospace experiencing complete absence of business for almost two months during the quarter, these clients are likely to lead pricing pressure on the IT companies and also delay payments so DSO (Days sales outstanding) will be a key metric to watch. In addition, with companies vary of processing large deals during such times, the focus will shift to renewals of existing deals," said an IT sector analyst requesting anonymity. Large deal renewals was also guided for by TCS in Q4.
While globally and across sectors the pandemic has resulted in a wave of unemployment, IT Companies had informed last quarter that they will continue to honour existing job offers even if they restrict lateral hiring.
Further, commentary will be awaited on the impact and workaround strategies for the current H1B visa restrictions, although most don’t expect it to be a long term measure.
“Immediate emphasis (from management commentary) will be on operational cost optimization initiatives. Companies are looking at levers such as automation, pyramid correction, onsite-offshore mix, sub-contractor and travel costs, deferring compensation revisions and promotions, etc. Liquidity, cash and working capital management are other key focus areas," said a July 2 report by Motilal Oswal on the sector.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
