IT services firms sees sluggish growth in 2Q16

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According to Nomura Financial Advisory and Securities (India), the top-tier IT services firms grew 10.1% in constant currency terms in the March quarter.

Revenues for the first quarter of the year for India's top software services firms grew 10.1% in constant currency terms in the March quarter, according to Nomura Financial Advisory and Securities (India) At the beginning of the fiscal year, growth stood at over 13%. According to Nomura, "The 4Q results reinforce our view that revenue growth for tier-I IT players in FY17F will be slower than in FY16.”

Analysts from Kotak Institutional Equities, in a note to clients, wrote “Ebit (earnings before interest and taxes) margin (in the March quarter) disappointed and faces transient challenges of—(1) large deals that are priced assuming significant cost take-outs through automation even as these capabilities are work-in-progress and (2) incremental investments in the digital business.”

Tata Consultancy’s margins fell by 54 basis points despite benefits from the depreciation in the rupee. One basis point is one-hundredth of a percentage point.

US-listed Cognizant Technology Solutions, which has almost always led in terms of growth, surprisingly reported a 0.9% decline in revenue, sequentially. It has marginally cut its revenue growth guidance from 10-14% to 10-13%. The saving grace is that it expects growth to pick up sharply in the June quarter, and make up for the decline in the past quarter’s revenue.

The March quarter results suggest a slowing of revenue and profit growth in FY17. Some companies such as Infosys may well buck the trend, thanks to the momentum they have gained through large deal wins. But with valuation multiples of 18-20 times, companies with good prospects are already pricing in decent growth.

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