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During the earnings season, investors will watch out for the outlook on IT spends in 2021. Photo: Mint
During the earnings season, investors will watch out for the outlook on IT spends in 2021. Photo: Mint

Revenue momentum of IT cos may sustain in Q3

  • The companies are likely to report steady sequential revenue growth on the back of broad-based demand recovery, ramp-up of large deals, strong deal wins and continued traction in digital

BENGALURU : India’s major information technology (IT) companies such as Tata Consultancy Services Ltd (TCS), Infosys Ltd, HCL Technologies Ltd and Wipro Ltd are expected to report revenue growth despite the December quarter being a seasonally weak period due to year-end holidays and furloughs in key markets such as the US and Europe.

According to brokerage Emkay Research, the companies are likely to report steady sequential increase in revenue on the back of broad-based demand recovery, ramping up of large deals, strong deal wins and sustained growth in the digital business.

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“Indian IT companies are poised to turn in the best third quarter in a decade given highest-ever order books, marked revenue acceleration, margin expansion, and ongoing outlook upgrades," Edelweiss Securities said in a pre-earnings note.

Increased demand for cloud and digital will drive industry-wide pickup in revenue growth from the pre-pandemic levels of 9-10% to 12-13% in FY22 and 14-16%, thereafter, till FY27, said Edelweiss.

“We also estimate industry margins over the next five years would be at least 300 basis points higher than pre-pandemic led by work-from-anywhere savings and lower non-business travel costs," it added.

Tier-1 IT services players have won large digital transformation deals in recent months, which will drive revenue growth. In December, Infosys signed an estimated $3 billion deal with German auto giant Daimler AG. In August, it had won a $1.5-billion deal with US investment firm Vanguard.

Wipro, too, signed a deal with German retailer Metro AG with an estimated value of up to $1 billion over nine years.

Global IT major Accenture, which follows a September-August fiscal year, raised its FY21 guidance to 4-6%, including acquisitions, up from the earlier estimates of 2-5% following market share gains and a relatively better outlook. “Accenture’s FY21 guidance implies that double-digit growth in FY22 for Indian IT service players is quite realistic," analysts from Nirmal Bang Equities said.

For the third quarter ended 31 December, Edelweiss expects India’s top two IT services firms, TCS and Infosys, to post sequential dollar revenue growth of 4% and 5%, respectively, in constant currency terms. Also, while Wipro’s dollar revenue is expected to grow 3.1% sequentially in constant currency, HCL Tech is likely to post sequential dollar revenue growth of 3.5%.

The companies are expected to benefit from the core transformation of clients and higher adoption of cloud and digital. Increase in offshoring and cost rationalization initiatives will also continue to support margins.

“Considering the improved productivity and seamless execution during these covid times, we expect the offshoring trend to witness improved traction. Coupled with rationalisation of subcontracting cost, automation, pyramid rationalization and higher digital value will help IT companies maintain margin defensibility despite headwinds like wage hikes, higher travel and other discretionary spends," ICICI Securities said.

During the earnings season, investors will watch out for guidance on IT spends in 2021, the impact of the second and third waves of covid-19 in the US and Europe on travel and hospitality, the extent of margin compression in FY22, and beyond, as operations normalize, and the pipeline of large deals.

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