COVID-19 uncertainty may impact IT toplines

The Covid-19 pandemic is likely to hit the revenues of IT services firms in India, that commence their earnings season later this week.

The US and Europe -- the epicentre of the pandemic may impact the Indian IT sector as the two geographies make up about the majority of India's IT services topline.

Brokerage firm Motilal Oswal says that uncertainty will overshadow Q4 results. It says that companies are, much like their global peers expected to delay their guidance on FY21 outlook or provide a wide guidance band, subject to sharp revisions later on as clients relook their IT budgets.

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Globally, two IT majors, Accenture and Cognizant have already withdrawn their guidance for 2020. Closer home, IT majors Wipro and TCS will be releasing their Q4 results later this week on April 15 and 16, while Infosys is yet to announce a date for the results and is expected to come out with the results after April 20.

Commentary around deal closures and ramp-ups, expected pressure on pricing, sharing Rupee depreciation benefit will remain a key focus area, MOFSL points out.

These are the key issues that brokerage firm Sharekhan also highlights in its outlook for IT firms. It says that the January-March quarter is expected to be a weak quarter for Indian IT companies, on account of lower billings from lockdown measures in western countries and India in wake of the outbreak.

"Though management of IT companies has restrained to quantify the potential impact of the COVID-19 breakout on the financials, there has definitely been disruptions in service delivery and execution due to travel restrictions and work-from-home (WFH) advisories since mid-March. "Within tier-I IT companies, HCL Tech would lead the pack in terms of revenue growth given lower exposure to the impacted verticals, while Tech Mahindra (Tech M) would be impacted most owing to higher BPO exposure and softness in the enterprise vertical. The top five Indian IT companies are expected to deliver -0.2% to +0.9% q-o-q constant currency (CC) revenue growth."

However, the report does say that it expects a stable margin profile for tier-IT companies as benefits from rupee depreciation (2.5% against the US dollar) and lower travel expenses will be mitigated by lower revenue growth and cross-currency headwinds. TCS and HCL Tech are likely to report robust order bookings as these companies have signed deals at the staring of the quarter. On a sequential basis, Tier I revenue should move in the range of (0.5)%-1.3%(CC) and (1.7)%-0.6% ($) with HCLT/TechM leading/lagging the pack.

"We assume revenue growth would be significantly impacted during FY2021E, while growth would spike in FY2022E with normalisation. Operating profitability is expected to benefit from rupee depreciation, lower travel expenses, postponement of wage hike, and lower variable compensation payout in FY2021, which will be partially offset by lower revenue and pricing pressure."