In a seasonally strong April-June quarter when client budget for technology spend starts rolling out, India’s top-tier information technology (IT) services companies are expected to end the first quarter of the current fiscal on a positive note. The brokerage firms tracking the sector expect large-cap IT players to post a strong revenue growth backed by large deals and strong demand for digital services among clients during the pandemic.
“Q1FY22 is expected to be another strong quarter of growth for Indian IT players, after a remarkable performance in FY21. Growth is expected to be driven by ramp up of large deals and accelerated cloud adoption and digitisation. However, some companies are likely to report minor supply side issues, due to the second wave of Covid-19 in India,” analysts of brokerage firm PhilipCapital argued in a recent report.
Analysts expect large IT companies to post dollar revenue growth in the range of 2%-7% quarter-on-quarter in constant currency (CC), with some excepting Infosys and Wipro to lead the pack. However, analysts at PhillipCapital are of the view that HCL Technologies could post dollar revenue growth of 1% quarter-on-quarter in CC. IT companies typically use the constant currency method to eliminate the effects of exchange rate fluctuations while calculating financial results.
“We expect sequential revenue growth to approach pre-Covid-19 levels in a typical June quarter. Q1 is seasonally strong,” noted an ICICI Securities report.
The momentum is already set by the country's largest IT-services company Tata Consultancy Services (TCS). Last week, the IT major posted a 28.5% year-on-year jump in its net profit, while revenue rose 18.5% for the quarter ended June. These robust results were primarily due to TCS’ growing business in North America, its largest market, along with a strong performance in its BFSI and retail verticals. TCS posted a net profit of ₹9,008 crore in Q1, while revenue stood at ₹45,411 crore. In dollar terms, revenue stood at $6.154 billion, up 2.7% quarter-on-quarter. The IT major’s operating margin was recorded at 25.5%.
Now the mantle has passed on to the second-largest IT firm Infosys which will announce its first-quarter earnings on July 14, followed by Wipro on July 15, and HCL Technologies on July 19.
Some brokerage houses expect Infosys to raise its FY22 revenue growth guidance of 12%-14% in constant currency it predicted earlier to 13%-15% (noted Kotak Institutional Equities) and 14%-16% (noted Prabhudas Lilladher). However, analysts like Girish Pai, head of research, Nirmal Bang Institutional Equities, are of the opinion that Infosys could raise its current revenue growth guidance (12%-14%) only after the second quarter of the current fiscal.
“With record large deals won in FY21, we would seek management’s commentary on the strength of the pipeline and also the quarter’s total contract value (TCV). Last year, it was at $1.7 billion. We are expecting growth of TCV in the teens,” noted Pai in a report, adding that with attrition rate at 15.2% in Q4 of FY21—highest compared to its competitors such as Wipro and TCS—there is a strong possibility that it could have some impact on the company’s talent costs and on margins. “Market would watch for hints as to where Infosys would land up within the margin guidance of 22%-24% that it has given for FY22,” he added.
Analysts expect margin correction for most large IT companies driven by wage hikes, strong hiring, and moderation of utilisation levels.
For Wipro, margins are expected to decline 140 basis points (bps) quarter-on-quarter with two-month impact of wage hikes and senior management hiring offset by strong growth, while for HCL Technologies, margins are expected to decline by 60 bps on product revenue decline and investments in geographic expansions announced by the company earlier. Similarly for Infosys, margins are likely to decline by 80 bps due to aggressive lateral hiring, noted PhillipCapital in a report.