Q2 Results Preview: IT Revenue To Rise For Fifth Straight Quarter, Pressure Looms On Margins
What's in store as India's biggest IT companies report Q2 numbers.
India’s biggest software exporters are expected to report an increase in revenue for the fifth straight quarter, aided by improved demand, deal wins and growth momentum in core verticals. But wage hikes, higher attrition and discretionary costs may hurt margins.
The aggregate revenue of the five information technology companies in the Nifty 50—Tata Consultancy Services Ltd., Infosys Ltd., HCL Technologies Ltd., Wipro Ltd. and Tech Mahindra Ltd.—is set to rise 4.87% sequentially in the quarter ended September, according to analysts’ estimates compiled by Bloomberg. The combined net profit is projected to increase 1.5%.
That compares with Motilal Oswal Financial Services’ constant currency sequential revenue growth estimates of 3.9–6.9%.
Prabhudas Lilladher said in a note that Infosys and HCL Tech are expected to post the highest organic growth among tier-1 companies.
Infosys will lead growth at 5.6%, aided by its deal with Daimler AG, followed by HCL Tech and TCS at 5.5%.
Wipro, according to IDBI Capital, is expected to grow 6.4% sequentially, led by Capco acquisition.
ICICI Direct expects banking, financial services and insurance, retail, manufacturing, hi-tech and life-science segments to drive revenue for the the sector.
TCS kick-starts the second-quarter results season on Oct. 8.
Deal Pipeline
TCS bagged nine deals, while Infosys and HCL Tech announced eight and seven, respectively, in the July-September period.
Most of the deals were in cloud-led digital transformation, customer experience and workplace transformation, Prabhudas Lilladher said. “We expect TCS, Infosys and HCL Tech to report strong total contract value led by continued momentum in deal wins.”
Though there have been no mega deals this year, volume of digital mid-sized deals has increased, resulting in a stable total contract value, the brokerage said.
Guidance
According to Morgan Stanley, Accenture’s fourth-quarter earnings and outlook for FY22 provide comfort for Indian IT services, and the order book across the board remains healthy.
Emkay Global expects Infosys to raise its FY22 revenue growth guidance to 15-17% in constant currency from 14-16% earlier. It also expects the Bengaluru-based company to retain its EBIT margin forecast of 22-24%.
HCL Tech is likely to retain its double-digit constant currency revenue growth and 19-21% EBIT margin guidance for FY22, the brokerage said. Wipro is expected to guide for 2-4% revenue growth for the third quarter ending December, it said.
Operating Margin
Prabhudas Lilladher expects IT companies’ operating margins to decline 50-250 basis points sequentially because of wage hikes, supply-side crunch, higher attrition, hiring, lower utilisation, cross-currency headwind and higher discretionary cost.
As companies accelerate fresh hiring to cater to increasing demand, utilisation of companies is expected to take a hit, while subcontracting costs are likely to accelerate, according to ICICI Securities. That, it said, will have an impact on margins.
Among tier-1 information technology companies, Motilal Oswal expects TCS to report a margin expansion, while Wipro will have the highest erosion of 180 basis points on account of a wage hike, absence of a one-time tailwind and Capco impact.
Wage hikes are also likely to impact Infosys’ margin. HCL Tech, too, is expected to see a 100-basis-point hit sequentially on increased wages, supply-side issues and higher discretionary cost.
Stock Performance
For the quarter ended September, the Nifty IT Index gained nearly 22.43%, led by TCS, L&T Technology Services Ltd. and Mphasis Ltd. The Nifty 50 rose 11.55% during the period.
Watch Out For
FY22 outlook on EBIT margin, hiring and attrition trends and offshoring.
Upgrades in revenue guidance.
Deals intake.
Digital business outlook.
Commentary on ability to maintain double-digit growth beyond FY22.