Q4 earnings preview: IT sector growth to moderate in March quarter

Information technology (IT) sector bellwethers Tata Consultancy Services (TCS) and Infosys are set to release their financial results for the quarter and year ending March 31, 2022, next week. The sector’s revenue growth is expected to moderate in the March quarter, while margins are expected to take a hit due to continued high attrition, according to a recent report.

TCS, the country’s largest software exporter, will kick off earnings season by releasing its earnings numbers on April 11, followed by Infosys on April 13.

“The growth of Indian IT companies is expected to moderate in Q4FY22 as witnessed in Q4 quarters historically. Margins are expected to take a hit due to continued higher employee expenses,” domestic brokerage firm ICICI Direct said in a report.

The report pegs TCS, Infosys, and Wipro – the country’s leading software exporters – to post constant currency (CC) revenue growth in the range of around 3-3.5% quarter-on-quarter (QoQ), while HCL Technologies is expected to post the weakest growth of 2% on a sequential basis due to negative impact coming in from its products and platforms (P&P) business.

In dollar terms, TCS, Infosys, and Wipro are projected to see dollar revenue growth of 2.7-3.2% QoQ, respectively. HCL Technologies (HCLT) is expected to witness a dollar revenue growth of 1.7% QoQ.

Meanwhile, mid-sized IT companies Tech Mahindra, L&T Infotech and Mindtree are expected to report 5% CC growth. “There would be cross-currency headwinds in the range of 20-50 bps for the companies mentioned above, which would impact dollar revenue growth negatively,” the report noted.

As per the report, the IT sector’s demand outlook continued to be strong led by continued deal momentum led by segments like BFSI, insurance etc. “The companies continue to see a demand tailwind (recent Accenture commentary and outlook suggests that) in terms of investment in newer technologies like cloud transformation (as per Accenture commentary, only 30% of applications has been migrated to cloud, suggests long tail of cloud transformation ahead), AI/ML, blockchain, which is expected to further propel demand in coming quarters,” the report highlighted.

“In terms of margins, we expect them to decline since supply side headwinds would put pressure on margins,” it added.

Analysts at ICICI Direct expect margins to contract QoQ despite the industry continuing to add record freshers. “The attrition across companies would continue to be high and, hence, cost to backfill attrition (at higher costs) and costs related to retention, bonus, rationalisation of compensations are expected to put pressure on margins. We expect all IT companies to report a decline in EBIT margins sequentially in the range of 20-80 bps,” it added.

The key thing to watch in the December quarter results would be improvement in deal pipeline, demand outlook for FY23, hiring and attrition trends, and margin outlook. 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, the report said.

Among individual companies, TCS’s revenue growth momentum is expected to continue in Q4 while margins are likely to take a hit due to higher manpower expenses. TCS is expected to register 3% QoQ growth in constant currency led by continued improvement in demand from BFSI, healthcare and retail, acceleration in digital technologies, ramp up of deals.

Meanwhile, Infosys is expected to register 3% QoQ growth in constant currency led by momentum from financial services, retail, communication, energy and manufacturing. Wipro is projected to report 3.5% QoQ constant currency growth in revenues in IT services.