IT Stocks Outlook for the Week – 06 to 10.04.2015
Stocks of information technology companies may continue to
underperform for forecasts of Jan-Mar earnings. Most IT stocks fell by around
2% last week even as the broader market ended up by around 3%.
Last week, HCL Technologies joined the list of IT companies in
voicing warning about rising dollar impacting both revenue and margins. It said
revenue for the Jan-Mar quarter would be hit by about 280 bps and margins by
around 80 bps. The US dollar appreciation against global currencies is likely to
impact the reported revenue growth of Indian IT companies in Q4 FY15.
We expect that the negative impact of cross currency movement will
be felt in FY16E as well given the currencies stay at same level. Volume growth
in Q4FY15 will be impacted due to following factors - a) lower spending in
verticals such as telecom, insurance, b) sharp decline in oil prices which
might affect IT spend of energy and utilities vertical and c) slower pick-up in
momentum in Jan-Feb.
Technology companies would likely (to) report low USD revenue
growth in the March 2015 quarter (between -3.4% and 0.5% QoQ) due to seasonal
weakness and cross-currency headwinds. Margins would also be adversely impacted
by about 30-80 bps due to exchange rate movements.
However, the IT stocks have corrected sufficiently over the last
few weeks, and more than fourthquarter numbers, they are likely to react to
management commentary about the coming year. While IT stocks have corrected
amid Q4 profit warnings, outlook for FY16 remains the key. We continue to
prefer large-caps (Infosys/HCL Technologies) with limited earnings downgrade
risks. Infosys Ltd, which usually kicks off the earnings season, will report
its results on Apr 24.
