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Technology

Tata Consultancy, Wipro likely to post muted third-quarter profit

Shutdowns, furloughs during the holiday season to dampen earnings

According to Morgan Stanley says the demand environment in the IT sector is not expected to improve this year amid the higher probability of volatility in IT spending as the U.S. heads into elections. ( Photo by Ken Kobayashi)

MUMBAI (NewsRise) -- Indian software exporters Tata Consultancy Services and Wipro are set to report muted profit in the third quarter amid shut downs and furloughs during the holiday season in major markets.

"Growth trends could be muted due to furloughs while margin performance may be divergent due to company-specific factors," Morgan Stanley said in a report.

Further, the demand environment is not expected to improve this year amid the higher probability of volatility in IT spending as the U.S. heads into elections, it said. "The growth has disappointed in 2019 and with these additional factors going into 2020, the year is likely to remain noisy with low visibility."

The trade row between the U.S. and China and fears of Britain exiting from the European Union without a trade deal also pose looming threat on the industry's prospects.

Most analysts expect the overall sequential revenue growth in constant currency terms for large Indian IT companies to be in the range of 0.6% to 1.9%, while margins are likely to expand on the back of a weaker Indian rupee and absence of wage costs.

An average 1.3% fall in the Indian rupee against the dollar in the last quarter would make Indian outsourcing companies more competitive and expand the local value of their revenue earned in dollars.

India's largest outsourcing company Tata Consultancy Services, or TCS, is likely to see its October-December net profit rise less than 1% to 81.58 billion rupees ($1.1 billion), on a 6.6% increase in revenue to 397.90 billion rupees, according to a Refinitiv poll.

TCS is likely to see continued volatility in the capital markets and retail business segments, Morgan Stanley said. In July, the company said it is focused on reporting double-digit increase in revenue in the fiscal year 2020.

Second-ranked Infosys is set to kick-start the third-quarter earnings on Friday. The company is likely to post more than 17% jump in net profit to 42.39 billion rupees, according to the poll. Its revenue could increase almost 8.4% to 232.02 billion rupees in the quarter, the estimates show.

The New York- and Mumbai-listed company is expected to maintain its outlook for revenue growth in constant currency terms at 9%-10% or even raise it if the third quarter revenue beats expectations, according to analysts. The software exporter has been mired in a controversy after a whistleblower alleged instances of lapses in corporate governance standards.

Third-ranked HCL Technologies, backed by billionaire Shiv Nadar, is likely to see a 5.6% rise in net profit to 27.56 billion rupees, while revenue may jump more than 15% to 180.80 billion rupees, the Refinitiv poll showed.

HCL Technologies, set to report its third-quarter results on Jan. 17, is expected to retain its growth outlook of a 15%-17% increase in revenue for this fiscal year. Its organic revenue is likely to grow 10% to 11%, PhillipCapital said.

The company has been growing faster than some of its larger rivals thanks to the string of acquisitions and partnerships it struck in the past two years.

Fourth-largest Wipro is likely to see a 1.9% decline in net profit to 24.63 billion rupees, while its revenue may grow 1.8% to 153.32 billion rupees, the Refinitiv poll showed. Analysts expect Wipro, which has been lagging behind its rivals, to predict no growth or at best a 2% increase in revenue for the fourth quarter.

Wipro, which will report its earnings on Jan. 14, has been contending with persistent challenges in executing orders as well as retaining market share in its traditional software services in the face of intense competition.

Shares of TCS gained 2.3% in Mumbai trading on Wednesday, while that of Infosys closed down 1.3%. Wipro shares lost 0.4%, while HCL gained 0.1%. The benchmark S&P BSE Sensex lost 0.1%.

--Dhanya Ann Thoppil

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