India’s large-cap information technology (IT) companies such as Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies are likely to end the second quarter of the current fiscal on an upbeat note. Brokerage houses tracking the sector expect top-tier IT players to post strong revenue growth, led by large deal wins and robust demand for their digital transformation offerings and core software services among clients globally.
For the quarter under review, analysts expect these companies to record dollar revenue growth in the range of 3-7% quarter-on-quarter in constant currency (CC) terms. IT companies typically use the constant currency method to eliminate the effects of exchange rate fluctuations while calculating financial results.
The IT earnings season kicks off from October 8, with India’s largest software services company TCS announcing its results for the July-September quarter.
According to analysts tracking the sector, broad-based demand across business verticals, strong deal wins, increased traction in digital and Cloud business, and ramp-up of large deals will be key growth drivers during the quarter.
“IT companies are expected to continue their revenue growth momentum in Q2, a reflection of strong deal-signing momentum. We expect BFSI, retail, manufacturing, hi-tech and life science to drive revenues in the quarter,” says Sameer Pardikar, analyst at ICICI Securities in a report on the sector.
Pardikar points out that while TCS is expected to continue its strong revenue traction for the quarter, margins are likely to be hit due to lower utilisation and higher subcontracting costs. “It is expected to register 3.5% quarter-on-quarter growth in constant currency led by improvement in demand from BFSI, healthcare and retail, acceleration in digital technologies and ramp-up of deals and also recovery from the India market, which declined 14% quarter-on-quarter in Q1.”
For TCS, EBIT margins are expected to decline 30 basis points (bps) quarter-on-quarter to 25.2% led by higher subcontracting costs and lower utilisation. However, profit after tax (PAT) is likely to improve by 1.4% sequentially mainly led by higher other income, Pardikar adds.
According to a research report released by Emkay Global Financial Services, EBIT margin is likely to remain under pressure for some companies such as Infosys, Wipro, Persistent Systems, Mindtree and Birlasoft due to the salary hike cycle, higher subcontracting costs, uptick in attrition, and higher recruitment costs. For the remaining companies, EBIT margin is likely to be flat.
India’s second-largest IT firm Infosys will announce its second-quarter earnings on October 13 along with Wipro, while HCL Tech will announce its results on October 14.
“Infosys is expected to raise its FY22 revenue growth guidance to 15%-17% [in] CC year-on-year [from] the current 14-16% while retaining its EBIT margin guidance of 22-24%. HCL Tech is likely to retain its double-digit CC revenue growth and 19-21% EBIT margin guidance for FY22. Wipro is expected to guide for 2-4% revenue growth for Q3 of FY22,” according to the Emkay Global report.
While announcing its first-quarter results, Infosys said it expects its revenue to grow by 14-16% in FY22, up from the earlier estimate of 12-14%.
In the last one year, the Covid-19 crisis forced businesses across sectors and markets to accelerate their digital transformation initiatives, which led to an increased demand for services offered by large Indian IT players.
“Wipro knows that industry growth will largely be led by next-generation technologies and services. The company, therefore, expects to see huge incremental growth in areas such as digital, Cloud, data, engineering and cybersecurity,” noted a report by Elara Capital. “With the pandemic accelerating digital transformation and providing growth tailwinds, we believe, this competitive advantage may translate into improved growth, going ahead… We envisage the likelihood of Tier-I IT [players] posting double-digit growth in the next five years to be high,” the report added.