IT | Results confirm signs of slowdown

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The December quarter is a seasonally weak one for information technology (IT) services companies, with a higher number of holidays as well as furloughs taken by clients.

In 2015, things were expected to be worse because of the severe floods in Chennai, where many Indian IT companies have large delivery centres.

While the expectations were running low, the actual performance turned out to be even weaker. Analysts at Religare Capital Markets Ltd wrote in a note to clients that the 14 IT companies tracked by it reported a 2.1% sequential growth in revenue in rupee terms, lower than its estimate of 2.6% growth.

Industry leader Tata Consultancy Services Ltd disappointed for the sixth straight quarter, with revenue growing by a mere 0.5% sequentially in constant currency terms. The second largest company in the sector—the US-listed Cognizant Technology Solutions Corp.—reported growth that was in line with expectations; although its guidance for growth in 2016 was far below expectations. Infosys Ltd, still in amid a turnaround, did far better. The company has repeatedly beaten the Street’s estimates, suggesting that it is out of the woods.

For a handful of other companies such as Mindtree Ltd, results were better than expected. But, overall, the December quarter results reaffirmed concerns about a slowdown in IT spending and its impact on the growth of India’s outsourcing companies.

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Religare’s analysts wrote in a note to clients, “Overall, Q3FY16 was a weak quarter on both the revenue and margin fronts. Growth should pick up moderately in Q4 for our IT universe on a low base of Q3; however, we expect a weak client environment (BFSI and energy) to keep the growth outlook muted.” BFSI is short for banking, financial services and insurance.

Analysts at Kotak Institutional Equities wrote in a 12 January note that FY17 is not shaping up well for the Indian IT services sector; they expect growth to drop by about 2-3 percentage points vis-a-vis FY16.

Still, a weak rupee and the lack of better alternatives has shielded the valuations of IT stocks to some extent. So far this year, the Nifty IT index has fared much better than the Nifty 500 index. Mobis Philipose