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Photo: iStock
Photo: iStock

IT firms to upgrade revenue guidance on strong digital demand

  • The revenues are expected to improve on a sequential basis led by ramp up of past deal wins, traction in digital technologies, and easing of supply side pressure

BENGALURU : The worst seems to be behind for the Indian IT services sector. During the second quarter earnings, which begin on 7 October with Tata Consultancy Services (TCS) Ltd, companies are expected to upgrade their revenue growth guidance on the back of sequential improvement in revenue and strong demand for digital services, analysts said.

“We expect Q2 FY21 to mark the beginning of guidance upgrades by companies and estimate upgrades by the Street," Edelweiss Securities said in a note. It expects companies to report their highest order book in history, substantial revenue acceleration, modest margin expansion, and massive outlook upgrades.

While TCS does not give a formal guidance, last quarter, Infosys Ltd had provided a revenue growth guidance of 0-2% in constant currency for 2020-21. Wipro Ltd continued to refrain from providing quarterly guidance citing uncertainties due to the covid-19 pandemic.

The revenues are expected to improve on a sequential basis led by ramp up of past deal wins, traction in digital technologies, and easing of supply side pressure.

According to ICICI Securities, tier-1 IT companies will likely see revenue growth in the range of 1-3.5% in constant currency terms. “This, coupled with cross currency tailwind of about 100-140 basis points will further positively impact dollar revenue growth."

While Infosys is expected to post dollar revenue growth of 4.7% q-o-q, TCS and Wipro are likely to be relatively slower with a growth of 3.8% and 2.4% q-o-q respectively, ICICI Securities said.

According to Fitch Ratings, the industry’s revenue will rise by high single-digit percentage in 2021-22, due to the rise in demand for digital transformation. “We believe the pandemic-related revenue decline is only short term."

Fitch believes that IT services companies focussed on digital businesses such as automation software and cloud-based service delivery, are likely to perform better than those with a focus on business process management (BPM) and legacy application and infrastructure services.

Digital and cloud will be the key growth drivers as clients have accelerated their investments in digital to stay competitive during the pandemic. High online activity has pushed the demand for digital services from 9-10% pre-pandemic to 12-13% in FY22 and 14-16% thereafter until FY27, according to Edelweiss.

Margins of top IT companies are expected to improve on account of stable wages at the bottom of the pyramid, virtual training capabilities enabling low skilling costs, and rising adoption of work-from-anywhere (WFA) model resulting in reduction of travel costs.

In terms of verticals, analysts believe demand is picking up from sectors such as life sciences & healthcare, telecom, media, and financial services although travel & hospitality, oil & gas, and manufacturing continue to feel the heat of the pandemic.

Fitch believes the impact on the H1-B and L1-B visa applications ban will be “limited" as companies have already been stepping up local hiring in the US to reduce dependency on the visas, as the related policies have been volatile over the past few years.

On an average, local employees account for 50-70% of Indian IT services companies’ total staff in the US. Most IT services companies have also adopted remote working during the pandemic. “The visa ban’s impact is thus minimized because few workers would have travelled to the US, even if the ban was lifted," Fitch said.

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