Indian Information Technology companies have been beneficiaries of strong deal wins and better margins amid cost cuts. As the spending on technology continues to rise, IT companies are likely to witness strong growth in Q3FY21.
Strong project flow and the on-track ramp-up of large deals, won over H1FY21 and are likely to offset the impact of seasonal factors for software companies. According to global brokerage CLSA, the top-five IT companies, Tata Consultancy Services (TCS), Infosys, HCL Technologies, Wipro and Tech Mahindra are expected to report 2-3 percent organic, constant currency (CC), revenue growth in a seasonally weak third quarter of fiscal 2021.
However, margins may normalize with reversals in some of the cost cutbacks.
"We estimate 2.5-3.5 percent QoQ US dollar revenue growth for the top five players in reported terms, including a modest cross-currency tailwind (10-40 bps) from US dollar depreciation against most major global currencies," CLSA said.
In CC terms, Infosys’ revenue growth is likely to be 3.2 percent QoQ, ahead of peers with the full ramp-up of the Vanguard deal won in Q2FY21 and TCS should be close with 2.9 percent growth.
Wipro is expected to witness 2.7 percent revenue growth while HCL Technologies may see 2.8 percent growth, ahead of its guidance of 1.5-2.5 percent as deals ramp-up. Tech Mahindra, with 2.1 percent QoQ rise expected, should report balanced growth between its two segments (telecom and enterprise).
Among mid-caps, CLSA expects revenue growth should recover (up 4.1 percent QoQ) for L&T Technology Services (LTTS) while Persistent could be strong (up 6.5 percent QoQ) on continued deal flow and seasonal strength in its Alliance business.
The Ebit margins are expected to decline on a sequential basis for most players with the resumption of annual wage revisions and promotions which were suspended so far in FY21.
"Utilisation should also moderate due to fewer working days, a larger number of employees taking leave (with the easing of the lockdown), and intake of campus hires. Deal transition costs could also pose a headwind," CLSA noted.
However, offshore shift and lower subcontractor costs due to easing of demand-supply at onsite are potential offsets. The currency impact should be broadly neutral.
"We expect 33-69 bps QoQ Ebit margin decline for Infosys, TCS and HCL. Wipro (up 33 bps, wage hike effective Dec 2020) and Tech Mahindra (40 bps, no hike) could be outliers. Strong revenue growth should aid margin expansion for LTTS and Persistent," the brokerage added.
The third quarter of fiscal 2021 has seen at-least five $100 million+ total contract value (TCV) deal wins for IT companies, including an estimated USD 3.2 billion Daimler deal for Infosys.
Larger deals, like the ones announced during 3Q, are typically cost-take out deals with meaningful rebadged headcount (and thus could be margin dilutive, at-least in the initial years), and as such have a long decision-making cycle, CLSA noted.
Infosys, HCL and Tech Mahindra remain CLSA’s preferred picks in the sector.
