IT sector earnings preview: Big IT to show mild effects in Q4, faces full blow-up in June quarter

ET Intelligence Group: The potential revenue loss for the top five information technology (IT) companies in the March 2020 quarter due to the Covid-19 pandemic may be capped at 2 per cent or around $300 million (approximately Rs 2,200 crore), shows an ET Intelligence Group analysis.

Historically, these companies have posted 1 per cent-2.5 per cent topline growth in dollar terms in the fourth quarter. This is likely to shrink in the range of negative 0.5 per cent to 0.5 per cent, thereby giving rise to the potential shortfall.

The impact will be limited in the March quarter, but will intensify in the June quarter since business activities in the major markets of the US and Europe were affected due to the effects of the pandemic from the second fortnight of March. These markets together contribute over four out of every five dollars to the revenue of top-tier companies including TCS, Infosys, HCL Tech, Wipro, and Tech Mahindra.

“We expect tier-I IT service vendors to report -0.5 per cent to 0.7 per cent quarter-on-quarter constant currency revenue decline or growth for the March 2020 quarter. We note that the coronavirus escalation has started from mid-March onwards in developed markets (USA and European region),” said Centrum Broking in a report.

Compared with the previous quarter, top IT companies are expected to report marginal drop in dollar revenues while the weaker rupee against the dollar may support the growth in the rupee denominated revenue.

According to the average of ETIG estimates and forecasts by five brokerages, the aggregate dollar-denominated revenue of the top five companies will drop sequentially by 0.1 per cent. In rupee terms, revenue will grow by 1.3 per cent while net profit may fall by 2 per cent from the previous quarter.

The IT companies are also expected to report pressure on billing and higher receivables due to likelihood of increase in the days sales outstanding (DSO) or debtor days.

“We have factored in impact of about 0.3 per cent to 1 per cent for vendors across our coverage due to Covid-19. We would also be watchful of the unbilled revenues and DSO data, as that is likely to spike up in the March 2020 quarter,” said Dolat Capital Market in a report.

The Covid-19 impact on the IT sector will be more pronounced in the first two quarters of FY21 which is expected to weaken the full-year earnings forecast. “Our estimates now factor a deeper impact in the June quarter and a gradual recovery over the course of the September quarter,” HDFC Securities noted in a report.

For FY21, it expects the sector to post dollar revenue and net profit decline of 0.5 per cent and 4 per cent compared with the 7.5 per cent and 3 per cent growth in FY20 respectively.