India’s Top IT Firms May Report A Rise In Revenue In Q2

India’s biggest software services exporters are expected to report an increase in revenue in the quarter ended September as supply-side constraints eased after economies lifted lockdown restrictions and demand in large verticals like telecom, financial services and insurance strengthened.

Analyst estimates compiled by Bloomberg pegged the aggregate revenue of the five Nifty 50 IT companies—Tata Consultancy Services Ltd., Infosys Ltd., HCL Technologies Ltd., Wipro Ltd. and Tech Mahindra Ltd.—to increase 1.82% sequentially in the July-September period. The rise in operating and net profit is expected to be much higher.

TCS will kickstart the earnings season on Oct. 7.

India’s technology companies had witnessed an increase in cost in the previous two quarters as employees worked from home after the coronavirus pandemic froze trade across the world. The firms even lost billings as they generate most of their business overseas and the bulk of it comes from clients in financial services, manufacturing and communications sectors.

But they derived the optimism from New York-listed Accenture Plc’s forecast to return to its pre-Covid-19 growth rates—single digits or low double digits—in the second half of fiscal 2021. HCL Tech, too, raised its revenue and operating margin guidance for the second quarter—a practice most IT companies had shunned in the three months ended March citing uncertainties related to the pandemic.

Besides, Covid-19 is expected to accelerate the growth of digital services as global and Indian clients ramp up their spending on cloud computing, artificial intelligence and internet of things.

The Nifty IT Index has risen 33% so far this year and is the best sectoral performer after Nifty Pharma that has gained almost 49%.

Here’s a look at how revenue, operating margin and deals of Indian IT firms may fare in Q2…

Revenue

In the quarter ended June, several large IT companies had indicated that disruptions caused by the pandemic limited outlook on revenue and earnings. Still, investor sentiment on such stocks remained buoyant as analysts expect the firms to raise guidance for the ongoing fiscal.

Infosys is expected to increase FY21 revenue growth guidance to 1-3% from 0-2% forecast earlier. Wipro may resume its practice of offering quarterly guidance and indicate a range of 0-2% for the three months ending December, Kotak Institutional Equities said in a note.

A recovery in revenue growth, though cost cuts implemented in the first quarter stay put, should help most companies manage the impact of 2% rupee appreciation through the second quarter, Pankaj Kapoor, an analyst at CLSA, said in a note.

Operating Margin

Operating margins of IT companies are expected to expand because of an increase in revenue and cost cuts that were implemented in the preceding quarter.

IT companies may post robust margin performance, led by tailwinds from easing supply-side impact, increasing utilisation levels, cost-saving initiatives, continued travel restrictions, and no major wage inflation, according to a note by Prabhudas Lilladher.

Deals

Concerns over clients putting projects on hold and delaying decisions on new deals due to slackness in retail, travel and transportation, hospitality and aerospace verticals had emerged in the first quarter.

And deal signings are not better in the second quarter as well.

It’s risky to extrapolate the second quarter’s strength to the third quarter. Based on typical seasonality, the third could be a shade better (in the range of 1-2% growth quarter-on-quarter) but is unlikely to be materially better, Yogesh Aggarwal, head of research at HSBC Securities, said in a report.

Watch Out For

• Deal wins and pipeline—the size of contracts and duration
• Currency movement benefit and receivables will be another area of investor focus
• Any expectation of higher furloughs in the third quarter of fiscal ending March 2021
• Potential wage increases and confidence on margin sustenance
• Share buyback announcements by IT majors, especially Wipro
• Whether pressure has eased in the severely affected verticals of travel, transportation, hospitality, auto, energy, etc. and when demand in these verticals will normalise
• Assessment of slowdown in the U.S. and Europe and potential impact in the ongoing fiscal
• Outlook on the U.S. capital market and banking financial vertical