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IT sector Q1FY22 preview: Strong order bookings, broad-based revenue growth key highlights

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IT sector Q1FY22 preview: Strong order bookings, broad-based revenue growth key highlights

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Strong order bookings, broad-based revenue growth and stable margins are expected to be the key highlights of the quarter for the IT sector.

IT sector Q1FY22 preview: Strong order bookings, broad-based revenue growth key highlights
The fiscal year 2022 is likely to see a healthy start in terms of earnings for the Indian IT sector as the second wave of COVID-19 is likely to have minimal impact on most players. Strong order bookings, broad-based revenue growth and stable margins are expected to be the key highlights of the quarter for the IT sector.
Global brokerage firm expects 1.7 percent to 3.4 percent sequential constant currency (CC) revenue growth for the top five players excluding Wipro in Q4FY21 while the execution impact from the second wave of COVID-19 should be minimal for most players.
Wipro is estimated to report 8.9 percent QoQ revenue growth with the integration of the Capco acquisition for two months. Revenue growth should recover for Infosys (3.4 percent QoQ CC) after a soft Q4FY21 and that for TCS at 2.9 percent should be steady except for some wave to impact on its India business which contributes 5 percent of revenue.
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"The second wave impact may be visible for HCL Technologies (1.9 percent QoQ), especially for its IT and business services segment that has a large delivery presence in the national capital region, one of the more severely affected areas by the pandemic. Acquisitions could boost reported growth for Tech Mahindra (2.4 percent) despite seasonal softness in its platform business (Comviva)," CLSA said in a report.
Among mid-caps, the second wave could be a drag for L&T Technology Services (LTTS) (1.9 percent QoQ) as well. The brokerage expects Persistent Systems to stay strong with 5.3 percent growth on continued strength in deal flow.
The IT companies are likely to some impact on margin during the quarter due to the annual wage hikes, but net currency impact may offset.
"Most players have reverted to their traditional wage revision cycle despite the delayed cycle in FY21 leading to wage revisions within 3-9 months. Attrition has remained high; we expect an optical uptick in the reported trailing 12-month attrition. This could also keep sub-contractor costs high," CLSA said.
Additionally, utilisation should come down with the intake of campus hires and a potential hit from the second wave. Deal transition costs could also pose a headwind. Q1 also has seasonally higher visa costs, it added.
However, the offshore shift, pyramid and efficiency gains (automation/project rotation) are potential offsets, while the net currency impact should also be positive.
Infosys, HCL and Persistent, where FY22 hikes are scheduled for 2Q22, should see modest QoQ expansion. Wipro should see an additional impact from Capco acquisition integration, the brokerage report said.
Project flow has been strong in Q1FY22, even as deal wins have been concentrated in the $50 m-$500 m TCV.
"We expect Infosys to retain 12-14 percent CC revenue growth/22-24 percent Ebit margin guidance and HCL of at least 10 percent CC revenue growth/19-21 percent Ebit margin. Wipro could guide for 3-5 percent CC revenue growth in 2Q22," CLSA said.
FY22 margin guidance and a confident stance on margin outlooks, especially by scale players, have lowered fear of potential supply-side risk. The second wave is also likely to delay a reversal in travel and operations costs.
Hence, CLSA expects margin management to likely remain under focus till attrition continues to rise optically. It suggests looking at player-specific levers such as higher realisations for TCS and Infosys and the profitability of legacy acquisitions for Tech Mahindra, besides operating leverage.
“Moderated expectations and stock consolidation over the past three months provide a good base for a move up, especially for large-cap companies, in our view," CLSA said. Infosys, TCS, HCL Technologies and Tech Mahindra are its preferred stock picks.
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