Revenue of India’s biggest software exporters are expected to rise for the third straight quarter as they continue their digital transformation towards a post-Covid world amid a second wave of the pandemic.
Analysts estimates compiled by Bloomberg expect aggregate revenue of the five information technology companies on the Nifty 50—Tata Consultancy Services Ltd., Infosys Ltd., HCL Technologies Ltd., Wipro Ltd., and Tech Mahindra Ltd.—to increase 2.74% sequentially in the quarter ended March. Net profit, however, is expected to decline 3% over the preceding three months.
That’s at the higher end of the range forecast by research firm CLSA which expects organic, constant currency revenue growth of 1.4-2.8% for India’s top five I.T. companies. “While this may appear soft after back-to-back quarters of nearly 4% average growth, it may get overlooked as order books likely remain healthy and management commentaries stay positive,” Pankaj Kapoor, analyst at the brokerage, wrote in his sectoral preview note.
Nomura is anticipating a 50-70-basis-point benefit from cross currencies. It also expects growth momentum in top-tier companies to continue, led by ramp-up of large deals. “We believe all companies will report a positive year-on-year constant currency revenue growth in Q4, with Infosys likely to lead with double-digit growth and Wipro to lag with flattish growth,” Rishit Parikh, analyst at the research firm, wrote.
The optimism stems from Accenture Plc.’s improved results for the second consecutive quarter. The company raised its FY21 revenue growth guidance to 6.5%-8.5% from 4-6% previously. Analysts had then said the American technology firm’s performance and second upward revision in revenue guidance will augur well for Indian peers.
Deal Pipeline
CLSA said although mega deal wins in the fourth quarter were fewer compared to the quarter ended December, the deal flow has remained “strong and concentrated” in the $50-500 million total contract range.
“Traction on large deals has improved across players and pipeline continues to be healthy, though comments on conversion rates will be the key,” Nomura’s Parikh wrote.
Infosys has announced more deal wins than TCS, despite only disclosing deals larger than $50 million. “While significant large wins are likely to see revenue accretion only in Q2FY22, higher revenue accretion from smaller wins could lead to a better revenue performance,” Nitin Padmanabhan, analyst at Investec, wrote in his note.
Guidance
Infosys revised its FY21 revenue and margin guidance for the second straight quarter after announcing its December quarter earnings. While revenue growth guidance was raised to 4.5-5% compared to the earlier forecast of 2-3%, operating margin guidance was increased to 24-24.5% from 23-24% previously.
Not the one to usually give guidance, TCS, too, said after its December quarter earnings it was confident of double-digit revenue growth in FY22.
HCL Technologies had raised its revenue growth guidance for the fourth quarter to 2-3% from 1.5-2.5% earlier. It had anticipated Ebit margin for FY21 to range between 21-21.5% from 20-21% predicted earlier.
Both Nomura and CLSA expect Infosys to guide for a constant currency revenue growth of 12-14% led by the Daimler deal and margin of 22-24% for FY22.
“We think Ebit margins have peaked in Q3FY21 and are likely to trend lower as supply side pressures increase,” Parikh of Nomura said. “As a result, we expect companies like Infosys and HCL Tech to revert to their pre-Covid margin guidance of 22-24% and 20-21%, respectively.”
Valuations
Technology stocks continued their impressive run from 2020 after emerging as one of the top performers during the pandemic-hit year.
For the quarter ending March, the Nifty I.T. index gained nearly 6.6%, led by mid-cap firms like Mindtree Ltd., Mphasis Ltd. and Larsen & Toubro Infotech Ltd. TCS Ltd. and Infosys Ltd. completed the top five names of the 10-stock gauge.
CLSA’s Kapoor thinks it’s time to get selective within the sector, with the brokerage highlighting Infosys, HCL Technologies and Tech Mahindra as its preferred picks.
CLSA has an ‘Outperform’ rating on TCS and L&T Technology Services and has an ‘Underperform’ rating on Wipro. For Persistent Systems, it has maintained its ‘Sell’ stance.
Watch Out For:
- Order book; size and profile of deal pipeline.
- FY22 guidance.
- Order booking in Q4 FY21.
- Outlook for aerospace and telecom sub-segments.
- Demand trends in stressed verticals and outlook in Europe.
- Margin outlook and capital allocation policy.
- Key drivers for growth in the enterprise segment.
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