IT firms prep for slow topline expansion

Leading IT companies are expected to log more robust revenue growth during the March quarter compared to three months ago. However, on an annual basis, they are bracing for their slowest topline expansion in a year that has seen disruptions from currency volatility, weather calamities in major locations and reduction in client spending.

At least half a dozen brokerages, that ET spoke to, expect India's top five software exporters to post sequential revenue growth of about two per cent, with InfosysBSE -0.99 per cent and TCSBSE -2.41 per cent largely expected to lead the earnings season this quarter. Infosys kicks off the earnings season on April 15.

A relatively good Q4 will still not be able to mask an otherwise lacklustre year for an industry that is facing a midlife crisis, a far cry from the 2000s when companies grew at an explosive pace and 30-40 per cent growth rates were seen as par for the course. For FY16, that growth rate has dropped dramatically to an average of single digits for India's top five software exporters.

Analysts at Nirmal Bang Institutional Equities wrote in a note on March 14 that the relationship between profit growth of S&P 500 enterprises and Indian IT services spending growth has waned since the 2008 global financial crisis. Instead, they see a strong correlation between S&P 500 companies' revenue growth and Indian industry's revenue growth in U.S. dollar terms.

"Thus, industry growth came in at 10.3 per cent in FY16 in US dollar terms (Source: Nasscom). If we look at the narrower group of tier-1 Indian players, the growth has been to the tune of only 7.5 per cent, which seems more in line with our analysis," they wrote.

According to Bloomberg estimates, Infosys is expected to lead the pack with FY16 revenue growth expected to be around 7.5 per cent in actual currency terms and around 11-12 per cent in constant currency terms.

Overall, this year has not been kind to India's top software firms, with growth rates expected to be at their lowest point since the Lehman crisis triggered a global financial meltdown in 2008-09.

What is also starting to happen is a divergence in commentary, with Cognizant warning of lower growth in 2016 due to macroeconomic volatility, while TCS immediately came out and reassured investors that it was not facing the same challenges as Cognizant.

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