Home / Industry / Infotech /  Demand outlook for IT companies seen strong even as margins witness pressure
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BENGALURU: With Indian IT services companies are set to announce their fiscal fourth quarter earnings (Q4FY22) beginning next week, investors will keep an eye on both the numbers and trends. As per sector analysts, demand outlook for Indian IT services companies remains robust on the back of strong tailwinds for the industry following digital and cloud transformation initiatives with enterprise clients.

India’s largest IT services company Tata Consultancy Services Ltd. (TCS) will announce its Q4FY22 earnings on 11 April, while Bengaluru-based Infosys Ltd. will release its numbers on 12 April.

“The companies continue to see a demand tailwind in terms of investment in newer technologies like cloud transformation, AI/ML, blockchain, which is expected to further propel demand in coming quarters," ICICI Securities said in an earnings preview report.

Accenture, which follows a September-August accounting calendar, reported strong second quarter earnings last month beating its own estimates. Accenture’s commentary suggests that only 30% of applications have so far migrated to cloud, indicating a huge scope for cloud transformation deals ahead.

Analysts expect the revenue commentary of Indian IT companies to remain strong in Q4, with no impact of the Russia-Ukraine war and inflation on demand. “While tier-II players would continue to outgrow tier-I companies, the gap should start shrinking in Q4. Revenue growth is expected to moderate QoQ in Q4 as a high base effect comes into play," brokerage firm Motilal Oswal said.

Brokerage firms expect TCS, Infosys, and Wipro to report constant currency revenue growth of 3.0-3.5% sequentially, while HCL Technologies is expected to post the weakest growth of 2.0% on a quarterly basis due to negative impact of its products and platforms business.

However, margins of IT companies are expected to come under pressure, and either remain flat or decline in Q4 due to supply side headwinds.

According to brokerage firm Sharekhan, EBIT margin is expected to remain flat to negative sequentially in Q4, “owing to slower revenue growth, lateral hires, and increasing travel expenses."

Motilal Oswal shared similar views, “We may see muted margins on account of wage inflation and slower growth in Q4 FY22."

During the fourth quarter earnings, some of the key factors investors will watch out for are improvement in deal pipeline, demand outlook for FY23, hiring/attrition trends, and margin outlook, according to ICICI Securities. “Further, the proposed restructuring by TCS and whether other IT companies would also follow on the same or not, would be an area of interest for the investors."

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