December is traditionally a weak quarter for IT companies. Business activities slow down in the US and Europe and new deals also usually get postponed amid the new year festivities.
However, these are unusual times and things are looking up for the IT industry. The Covid outbreak has pushed digitization into the fast lane. Global companies have increased their budget for boosting their IT infrastructure. Plenty is going in favor of the IT industry and recent commentary from IT companies have shared this optimism.
The industry is poised for a major earnings upgrade in the December quarter. The companies are also expecting the trend to continue in CY21. Their renewed optimism is largely helped by two factors:
(1) Ramp-up large deals and,
(2) Strong momentum in digital spending.
The recent deal wins by TCS (Postbank and Pramerica), Infosys (Rolls Royce and Daimler), and Wipro (METRO AG) should add the revenue visibility for these companies beyond FY22 & 23.
Q3 preview:
Accenture’s recent upbeat earnings have also increased the confidence of the Indian IT industry. The company reported a 4% growth in revenue to $11.76 billion during the recent quarter. Revenues were more than $200 million above the company’s guided range of $11.15 billion to $11.55 billion. The company has made an upward revision to its full-year growth outlook to 6% for the fiscal year 2021.
Accenture's performance has set the tone for the Indian IT industry before the earning season. As per the Motilal Oswal report, In Tier I, Infosys and HCL are likely to drive the revenue growth. In USD terms, Infosys/HCL's revenue is likely to increase by 5.9%/1.8% YoY respectively. TCS's revenue growth is estimated to be flat while Wipro's revenues are likely to decline by 1.8% YoY.
Among the tier-II companies, Persistent Systems and L&T Infotech are likely to outperform the peers with 10.8%/7.2% YoY growth.
Margin outlook remains stable:
Companies are likely to face margin deterioration due to the upward wage revision and large deal transition cost. The marketing expenses have also scooped up to pre-Covid levels.
However, this risk is likely to be nullified by the rupee weakness. A fall in the rupee versus the US currency is broadly seen as positive for export-focused sectors like the Indian IT space. The margins are also likely to be helped by lower travel costs and other cost-cutting measures.
Closing comments:
Growing digitization and larger deal wins are structurally positive developments. The management commentary of the IT companies will be crucial to set the tone for the future. And, an upward revision to the revenue guidance looks certain from FY22 onwards.
