Q1 Results Preview: Deal Wins To Lift IT Firms’ Revenue, Pressure Looms On Margin
An employee works on a laptop computer at an office in Bengaluru, India. (Photographer: Dhiraj Singh/Bloomberg)

Q1 Results Preview: Deal Wins To Lift IT Firms’ Revenue, Pressure Looms On Margin

Analysts expect Infosys Ltd. to post a higher revenue growth than peers in the quarter ended June, helped by large deal wins and continued client spending towards technology as the Covid-19 pandemic accelerates digital adoption. But the impact of wage hikes and attrition may weigh on IT companies’ margin.

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. — is expected to increase 5.05% sequentially in the April-June 2021 period, according to analyst estimates compiled by Bloomberg. That’s the fourth straight quarter of increase in revenue for the nation’s biggest software services exporters.

Their combined net profit is expected to rise 2.35% over the preceding three months.

That compares with Prabhudas Lilladher’s constant currency sequential revenue growth estimates of 1.4-9.4% for Tier-1 IT companies. “Infosys is expected to post the highest organic growth among Tier-1 companies,” the brokerage said in a report.

Motilal Oswal concurs. Infosys, it said in a report, will lead the growth at 3.9% in constant currency terms. TCS will follow at 3.8% and Wipro at 3.4% organic growth (9% quarter-on-quarter growth including the Capco acquisition). “HCL Technologies and Tech Mahindra are expected to grow at 2.4% and 2.1%, respectively, with Tech Mahindra benefitting from a 100-basis-points inorganic component.”

According to ICICI Securities, IT companies’ sequential revenue growth is expected to approach pre-Covid levels in the quarter ended June. “Besides the strong seasonality, base shift to an extent should aid the Tier-1 IT companies to report 1.4%-4% of organic, constant currency growth, with Infosys leading the pack and Tech Mahindra lagging.”

TCS will kick-start the first-quarter FY22 earnings season on July 8, 2021.

Deal Pipeline

Some of the large deals announced during the reported quarter include Wipro’s partnership with Levi Strauss Co. for providing global IT support services for the jeanswear maker. HCL Technologies signed a multi-million dollar digital transformation and hybrid cloud contract with Japanese commercial vehicle maker UD Trucks.

Tech Mahindra bagged a deal from the U.K.-based sandwich franchise chain Pret A Manger to enhance the technology support provided to its shops and operations. Infosys collaborated with Archrock—a natural gas compression services and equipment provider—to build and implement a platform to enhance field services and operations.

The deal pipeline has remained healthy across companies and is led by the demand in areas of cost takeouts, digital transformation including infra/apps modernisation, customer experience and cybersecurity, and vendor consolidation, Nomura’s Rishit Parikh said. “Conversion, however, is key, especially in case of large deals.”

The total contract value, according to Parikh, will moderate at TCS and Infosys as deal announcements have been weaker compared to prior quarters. “HCL Technologies led by deal wins with Hitachi ABB, UD Trucks and McLaren Healthcare; and Tech Mahindra will report robust TCV in quarter ended June.”


After the fourth quarter, Infosys had guided for its revenue buoyancy to continue even in the fiscal 2021-22 and had estimated 12-14% growth in constant currency. It forecast operating margin to be in the range of 22-24%.

HCL Technologies expects revenue in FY22 to grow in double digits in constant currency terms. It expects EBIT margin for FY22 to range between 19% and 21%. TCS, too, maintained a double-digit revenue growth guidance for the fiscal ending March 2022.

Wipro pegged its revenue to grow 11-13% in 2021-22. For the April-June quarter, it projected 2-4% growth, excluding new acquisitions Capco and Ampion.

“We expect Infosys to raise FY22 revenue growth guidance to 13-15% given strong Q1; and HCL Technologies to provide a formal guidance range of 10-12% revenue growth,” Parikh said in a note. “Also, we expect companies to retain their EBIT margin guidance to earlier stated levels.”

ICICI Securities expects the IT industry to revert to pre-Covid growth rates in the steady state post normalisation of base from September 2021. “Signs of this are already evident in the trend reversion in Q4FY21 and Accenture’s outsourcing in May-21.”

Operating Margin

ICICI Securities expects EBIT margin for Tier-I and Tier-II IT companies to contract 10-200 and 0-350 basis points, respectively, in the first quarter. “Full impact of salary hike will come for companies like TCS, Tech Mahindra, Coforge and Larsen & Toubro Infotech. Partial impact will be felt in companies like Wipro, Mphasis and Cyient.”

Attrition/replacement cost will be a key headwind during the quarter, the brokerage said. “Attrition for the industry has inched up sharply after a period of lull during the pandemic. Besides, high utilisation and bottlenecks related to campus hiring should translate into supply-side cost pressures.”

According to Prabhudas Lilladher, margin will slowly recover from the second quarter, aided by revenue growth leverage and easing of supply-side pressures.

Stock Performance

Technology stocks were one of the top performers in the pandemic-hit 2020, and continued their rally even in this year.

The Nifty IT index has gained for five consecutive quarters. The 10-stock gauge has gained 12.81% in the April-June period, led by mid caps such as Coforge Ltd., Mindtree Ltd. and Mphasis Ltd.

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