IT cos likely to see robust growth in Q4

Software services firms in India are expected to sustain strong growth momentum in quarterly earnings in the three months ended 31 March amid large deal ramp-ups and continued spend on digital programmes.

Analysts at top brokerages expect tier-I information technology (IT) companies such as Tata Consultancy Services (TCS) Ltd, Infosys Ltd, HCL Technologies Ltd and Wipro Ltd to post 1.3-3.2% organic growth in revenue in constant currency on a sequential basis in the fiscal fourth quarter.

“Aided by inorganic contribution and cross-currency tailwinds, reported revenue growth should be around 2-5% sequentially in dollar terms,” ICICI Securities said in a note.

Infosys and HCL Technologies are expected to forecast strong FY22 revenue growth guidance of 12-14% and 10-12% respectively. Kotak Institutional Equities said the revenue guidance should not be a “high hurdle” against the backdrop of strong deal wins and ramp up of the $3-billion Daimler deal, in case of Infosys.

The pandemic has accelerated the adoption of digital technologies and IT services companies were among the biggest beneficiaries of this shift. Cybersecurity, cloud, artificial intelligence/machine learning, internet of things, and 5G roll-out rank among the top priorities for technology investments.

Digital services are expected to clock a compound annual growth rate (CAGR) of 16.5% to reach $900 billion by FY25, said analysts. The top four Indian IT firms are expected to witness strong revenue acceleration driven by higher demand and pay-off from investments in new-age technologies and talent base, Reliance Securities said.

According to the brokerage firm, the key differentiators for digital solutions are “transformation DNA, industry-specific solutions, automation capabilities, and availability of digital talent. Digital component is likely to become the core component (67%) of IT services budget in FY25.”

Meanwhile, earnings before interest and taxes or Ebit margins will vary based on the wage revision cycles of each company. “Infosys, Wipro, L&T Infotech, and Mindtree have announced wage revisions and will accordingly report EBIT margin decline of 115-180 basis points quarter-on-quarter. TCS has already absorbed wage revision in the previous quarter and will accordingly report Ebit margin increase…All companies will end up with 20-570 basis points higher Ebit margin on a year-on-year comparison,” Kotak said.

Investors would closely track issues such as revenue guidance, deal wins including total contract value and deal pipeline, margin performance, trends in large deals, pricing in digital, performance and outlook on key verticals, and capital allocation for inorganic growth, HDFC Securities said.