The IT sector is expected to end FY11 on a moderate pitch. Market analysts say that the January-March quarter is when clients strategize their moves for the new financial year, so growth will be subdued sequentially as compared to other quarters."We expect modest results from the companies in our IT coverage universe. Though the macro scenario and demand outlook still remain bright, we expect a bland sequential topline growth due to the seasonally weak Q4," said Vijay Gautam , senior research analyst (IT) at Jaypee Capital.
According to a report by Dipen Shah, IT analyst at Kotak Securities, though the January-March quarter is normally soft, sequential growth will be reasonably good at about 5% and annual growth in rupee terms would be 26% for the top 4 IT companies.
The growth will be led by the global BFSI (banking, financial services and insurance ) vertical, where M&A activities have necessitated IT services, as well as verticals like manufacturing, which were slower to start spending and are now seeing increased deal flows. Analysts also say that onsite billing rates have been on the rise, and many domestic players, including Infosys,Wipro and MindTree are expecting positive movement in offshore billing rates.
Kotak expects TCS to grow 5.6% sequentially and 32% annually; while ICICI Securities expects the company to grow 3.5% sequentially and 29.3% annually. TCS is seen to benefit from its large exposure to BFSI.
Infosys is expected to grow between 3.2% and 4.7% sequentially and 23.4% and 25.2% annually. Analysts expect Wipro's IT services to underperform its large cap peers with a 1.6- 4% sequential growth and 13.9-16 .7% annual growth. The company is in the process of a major reorganization exercise and has implemented cost-cutting measures, reduced redundancies and is trying to make the organization more efficient. But those efforts may take time to play out.
There are mixed views on HCL. Some analysts feel that HCL has concerns due to its 3% revenue exposure to Japan and its struggling BPO business. However, despite these concerns, revenue growth for HCL is estimated at 3.8-5 .6% sequentially and 30.3-33 .5% annually, though these are from lower bases than those of its peers.
ICICI Securities expects IT companies to report average operating margins of 25.7%, a decline of 30 basis points sequentially due to modest revenue growth coupled with continued hiring. However, Kotak Securities expects that currency changes , cost efficiencies and scale benefits will push margins marginally upwards on a sequential basis.
Analysts maintain a positive bias on sector fundamentals over the medium-to-long term. As global IT spending is expected to increase by 5.6% in 2011 to $3.6 trillion, analysts remain bullish on prospects of the Indian IT services industry. Forrester Research has just raised its forecast for the US IT market for 2011 to 8%, from 7.4%, citing a strong momentum in business purchases of technology goods and services. But the growth would still be a bit slower than the 8.9% growth in 2010. That's because 2010 saw a huge boost in IT spending from M&As in BFSI that 2011 may not; and because the US recovery remains weak.
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