Brexit, US visa headwinds to drag Q3 revenues of IT sector down

While Q3 is a weaker quarter for the IT sector, headwinds such as a muted macro economic environment, Brexit and the US visa concerns are expected to hit earnings during this quarter.

Vishal Sikka, CEO of Infosys. Photo: PTI

The IT industry has been going through a rough time during the Q3 quarter. The BSE IT index continues to under-perform in comparison to the Sensex on a 6 months and 1-year basis.

This is due to the headwinds that the industry faces from muted global macro economic environment, Brexit and the transition of existing business to new technologies, said Urmi Shah, IT Sector Analyst in an IDBI Capital Research IT Services Sector report. She adds that the sector is likely to be hit by more issues such as the adverse visa rules. This is as there is news that the Republican Party is likely to reintroduce the H1B Visa restrictions bill in the US Senate when US when President elect-Donald Trump takes office.

Besides these headwinds, Q3 is expected to be a seasonally weak quarter for IT companies and this is expected to take revenues down further.

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“Weak seasonality coupled with cross currency headwinds will impact December 2016 quarter revenue performance of Indian IT Services players, we expect 0.6% to 2.7% constant currency quarter-on-quarter (QoQ) growth with 100 to 150 basis points QoQ cross currency headwinds for Tier I players,” said analysts Manik Taneja and Ruchi Burde in an Emkay IT Services report.

They expect HCL Technologies to report only a 2.7% QoQ growth, while Infosys is expected to report an even lower growth of 0.6% QoQ. “While weak seasonality will drive moderation in sequential growth rates for

Tier I players, we estimate marginal improvement in constant currency (cc) YoY growth trajectory to 8.9% for Dec’16E quarter V/s 8.3% YoY cc growth in Sep’16 quarter,” said the Emkay report.

For tier II IT players it expects a 0.8% QoQ growth during Q3 with Persistent Technologies at the top end. However, the IDBI report expects Tech Mahindra to grow at 3.5% QoQ led by its core-business growth of 3% QoQ.

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