IT sector claims it's on 'road to recovery', analysts say 'too early to judge'

The Indian IT sector may be taking the first few steps on the path to recovery, according to TCS CEO and managing director Rajesh Gopinathan but analysts believe that these are brave words.

During the last couple of months, the IT sector has been hit by several headwinds including the recent H-1B visa order which bans entry of Indian software employees to work for their onshore clients till the end of the year, while the pandemic has ensured that some of the biggest clients of Indian software services companies are reducing capital expenditure, deferring contracts.

This week will see the major IT services companies like Infosys, Wipro, Mindtree and a few others unveil their quarter one results, but a very few of them are expected to meet analyst expectations.

While Gopinathan at a press conference last week, said that the impact of the pandemic has bottomed out and hence should now start tracing its path to growth, analysts say that the possibility of giving out guidance by the major IT companies seems remote and even if some of them do, it may not be robust. “Indian Tier I techs will have a weak June’20 quarter, with sequential revenue falling 4 per cent – 8.1 per cent across our coverage universe. EBIT margin decline, however, may be limited by currency depreciation and other cost optimization measures,” Emkay Research in its note to its investors said. Other analysts we spoke to said most or all of them will skip giving guidance for the next quarter and for the entire year. However, there is a possibility of resuming the forecast for the second quarter.

“We would see greater confidence around the underlying belief on stability in business in Sept’20, with growth recovery in H2FY21 along with an outlook on pricing, possible offshore shift and likelihood of leveraging balance sheet strength for inorganic growth, “Manik Taneja at Emkay Research said.

According to analysts, tier-one software services companies are expected to report a 4 per cent to 6 per cent QoQ US$ revenue decline, while tier 2 companies may report a 4.5 per cent to 8 per cent fall in the June 2020 quarter.

In case Infosys and HCL Tech do provide a formal outlook, we would expect a 2 per cent to 4 per cent YoY cc revenue decline guidance for FY21. “In our opinion, formal guidance would also signal that the companies are much more confident of client spending trends and may strengthen the underlying belief that the offshore techs are likely to see stability in the Sep’20 quarter and growth in H2FY21 as the companies had suggested post-March’20 quarter results.”

On another front, the IT sector companies are likely to look out for acquisitions as the valuations have dipped to new levels. Infosys CEO Salil Parekh at the company’s AGM said they are actively looking at acquisitions in a major way to take advantage of the low valuations.

However, according to PhilipCapital Research, the Indian IT services’ sector appears to be a skewed landscape right now with six “mega” companies with revenues in $5 billion-$20 billion range and a plethora of “mid-cap” companies in the $500 million-$1 billion range. “The mega-companies have typically dominated the big-ticket enterprise deals, while the midcaps have been focussing on smaller, complex deals in niche domains. Over the last decade, only one company has managed to migrate from one “band” to the other – TechM which bought Satyam Computers,” the analysts at PhilipCapital said.