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Earnings recovery of domestic IT firms in sight

Author: Debasis Mohapatra/Thursday, January 18, 2018/Categories: IT & ITeS

Earnings recovery of domestic IT firms in sight

Mumbai: Information technology firms have come out of the trough and are likely to see an earnings recovery towards the second half of the current year.

Market research firms and analysts are of the view that increasing discretionary spend on digital platforms and corporate tax rate cuts by US government will benefit the Indian tech firms going ahead.

“Quarterly results of TCS and Infosys have met street expectations and there are no disappointments. However, full-fledged earnings recovery will take some more time. With reduction in corporate tax rate in US, we believe earnings of domestic IT firms will improve,” JK Jain, head of equity research at Karvy Stock Broking told The Finapolis.

He, however, said that a clear view on earnings recovery would emerge in the first quarter of the next financial year.

US Senate has recently approved reduction in corporate tax rates to 20% from 35%. Analysts believe this move would have a multiplier effect on earnings of Indian IT firms as they will be able to post larger profit with lesser tax outgo.

Similarly, IT spending on digital platforms will also see a rise as companies will have more disposable income to adopt digitisation.

According to a Gartner report, global IT spending is likely to rise 4.5% to $3.7 trillion in 2018. "Projects in digital business, blockchain, Internet of Things (IoT) and progression from big data to algorithms to Machine Learning (ML) to Artificial Intelligence (AI) will continue to be main drivers of growth," the report said.

Notably, recently announced Q3 results of TCS and Infosys have met the street expectations. While net profit of Infosys jumped 38.3% to Rs 5,129 crore in third quarter ending December 31, TCS reported a sequential increase of 1.3% in its net profit to Rs 6,531 crore.

Compared to biggies of IT sector, midcap IT firms have shown better performance in the recent past. “Midcap IT firms are performing better than big firms in Indian IT space,” Jain of Karvy Stock Broking said.

Meanwhile, big IT firms have also announced million dollar deal wins in the last one month. TCS alone has announced deal wins worth nearly $6 billion in the last one month. “Traditionally, deals are renewed or new deals are signed in the first quarter of every calendar year. So, we will not read much into the aspect now and wait to take a view on deals post March quarter,” Jain added.

Amidst this optimism, domestic IT companies are facing the risk of margin squeeze due to an appreciating rupee. “The ongoing rupee appreciation is a margin headwind. Any renewed concerns on regulations, especially visas, or new US tax laws could hurt," Morgan Stanley said in a report.

However, Jain said the impact of strengthening rupee will be marginal. “While rupee is moving sideways with respect to dollar, it is appreciating against other currencies. This can be negative for IT firms but the impact will be marginal,” he added.  

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