Business News/ Markets / Stock Markets/ Mid-tier IT companies shine in Q4 even as wage costs squeeze margins
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MUMBAI :Software services firms saw robust revenue growth in the March quarter, driven by strong deal wins amid accelerated digitization. Wage hikes, one-time bonuses and rupee appreciation impacted margins to some extent, which was partially offset by higher offshoring during the quarter.
Software services firms saw robust revenue growth in the March quarter, driven by strong deal wins amid accelerated digitization. Wage hikes, one-time bonuses and rupee appreciation impacted margins to some extent, which was partially offset by higher offshoring during the quarter.
Overall, mid-tier companies’ growth outpaced tier-I IT companies in the fourth quarter. However, analysts said, it does not signal growth moderation as the demand environment continues to be healthy. Management commentaries indicated a strong technology-spending environment, with a high focus on cloud migration.
Overall, mid-tier companies’ growth outpaced tier-I IT companies in the fourth quarter. However, analysts said, it does not signal growth moderation as the demand environment continues to be healthy. Management commentaries indicated a strong technology-spending environment, with a high focus on cloud migration.
A Mint analysis showed net sales growth of the top five IT firms— Tata Consultancy Services Ltd, Infosys Ltd, Wipro Ltd, HCL Technologies Ltd and Tech Mahindra Ltd—accelerated to 8.07% from a year ago in the March quarter from 5.98% in the preceding three months, and 7.61% in the year-ago period. Adjusted net profit growth (against one-time profit or loss) of these top tier firms grew 4.32% in the March quarter compared with 15.8% in the September quarter and 1.67% in the March quarter of FY20, based on data provided by Capitaline.
For 51 mid and small-cap IT firms, net sales growth was at 7.24% in the March quarter versus 6.78% in the preceding quarter and 4.95% a year ago. The adjusted net profit of these firms jumped 37.6% in the March quarter from a year ago. That compares with a growth of 26.7% in the December quarter and a decline of 6.94% in the March quarter of last fiscal.
“Three out of five tier-I IT top tier firms have missed our estimates. Infosys, HCL Tech and Tech Mahindra missed top line estimates by 0.5-1.1%. The miss suggests moderation after a couple of quarters of strong sequential growth. Reasons for the miss were company-specific—Infosys due to revenue deflation owing to offshoring, HCL Tech due to slow recovery in engineering research and development (ERD), and for Tech Mahindra, it was the slow pace of deal closures and slow recovery in the telecom vertical. The communications vertical was weak for all firms. Revenue growth was led by new outsourcing and digital-led deals," said Sumit Pokharna, vice-president of Kotak Securities Ltd.
Most firms reported strong deal wins while moderating slightly from the higher base of the December quarter. Mid-tier IT had stronger pockets of outperformance, led by Tata Elxi, Cyient and Mastek.
Wage hikes and staff additions hit margins, but these were offset by lower travel costs and increased offshoring. “Ebit margin declined in the range of 50-250 basis points (bps) quarter-on-quarter (q-o-q) for many companies owing to wage hike, higher subcontractor expenses and strong investments and strong headcount addition. However, margins improved for TCS, and Tech M was given higher utilization, improvement in offshoring and continued cost savings. The decline in utilization owing to aggressive hiring, rise in attrition, next round of wage revision, and shortage of talent in digital skills would impact margins in the medium term. We believe pricing would continue to remain stable," said Sanjeev Hota, head of research, Sharekhan by BNP Paribas.
According to Pokharna of Kotak Securities, in the March quarter, hiring by the top-five IT firms touched an all-time high. Net additions of these companies rose 29% from the preceding quarter to 46,087. “Consecutive quarters of record hiring clearly indicate a low bench and strong optimism on demand. Firms ramped up the hiring of freshers and laterals with a focus on offshore talent. Higher utilization, further improvement in offshoring and continuation of cost benefits for large firms due to work-from-home operations aided margins. Pricing continues to be stable. We believe margins face downside risk from the war for talent," said Pokharna.
Naveen Kulkarni, chief investment officer, Axis Securities, said rupee appreciation hit margins by 50-70 bps in Q4, which was partially offset by higher offshoring. As April-June is typically a strong quarter, Kulkarni expects top IT firms to report 4-5% sequential growth in constant currency terms, backed by a ramp-up in new deal wins. “For midcap IT companies, we believe 5-7% QoQ growth in constant currency terms," he said.
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