IT majors project healthy fiscal road map

Top-tier Indian information technology (IT) companies posted upbeat earnings for the first quarter of the current fiscal on the back of strong demand for outsourcing services globally in a pandemichit market. Analysts expect this momentum to continue for Tata Consultancy Services (TCS), Infosys, and Wipro for the rest of the year on the back of a large deal pipeline and robust demand outlook for their core software services and digital transformation offerings among clients.

Brokerage firms argue that for the large IT players, financial services sector will provide strong growth which will improve further in the coming quarters with the gradual opening up of the economy. This is besides growth in retail, communications, life sciences, and healthcare verticals led by digital transformation deals. In large markets such as Europe, manufacturing has partially resumed on the industrial front and the IT majors are expected to see “strong demand” for their services from the region.

“TCS flagged a robust deal pipeline driven by the multi-horizon cloud transformation cycle that will unfold over time and provide strong structural growth drivers,” Wedbush analysts Moshe Katri and Ryan Campbell argue in a note.

TCS management pointed out that growth in Q1 was led by cloud platform services, cyber security, analytics and insights, and enterprise application services. In the last one year, the Covid-19 crisis forced businesses across sectors and markets to accelerate their digital transformation initiatives. In the April-June quarter, Infosys’ digital business grew by 42% year-on-year, currently contributing 54% of its total revenue.

“Infosys is confident of delivering industry-leading growth, aided by solid relationships with clients, all-round capabilities and enterprises accelerating the implementation of their digital transformation agenda,” said Emkay Research in its report, adding that the IT major’s deal pipeline remains healthy with a good mix of new and renewal deals, offering “good revenue visibility.”

This led to Infosys raising its FY22 revenue growth guidance to 14%-16% in constant currency from its earlier projection of 12%-14%.

Similarly, analysts at Emkay Research feel at Wipro a second round of salary hikes covering about 80% of its employees (effective September 2021), promotions, increased hiring cost, and investments in front sales could likely weigh on profit margins in FY22.

Pravin Rao, chief operating officer, Infosys, points out that the IT firm’s onsiteoffshore ratio is highly optimised. “Operating parameters continued to improve during the quarter.

Utilisation improved further to a new all-time high of 88.5%. Onsite effort mix reduced further to a new low of 24.1%,” Rao said during the Q1 earnings call.

Infosys, however, retained its full-year operating margin forecast at 22%-24% considering the impact of salary hikes effective July 2021, transition costs of large deals, and discretionary costs including travel and other related expenses. Girish Pai, head of research, Nirmal Bang Institutional Equities, believes that Infosys’ Ebitda margin will land in the middle of the range rather than at the upper end.

The first quarter is typically a seasonally strong period for the exportheavy Indian IT-services industry when client budgets for technology spends starts rolling out. This was evident when the country's largest IT firm TCS recorded a total contract value (TCV) of $8.1 billion in Q1. For Infosys, TCV during the same period stood at $2.6 billion with 22 large deals. Wipro closed eight large deals during the June quarter resulting in a TCV of over $715 million.

“We see a robust demand environment. The quality of our overall deal pipeline is better than before,” says Thierry Delaporte, CEO and managing director, Wipro while announcing the Q1 results.

Devang Bhatt, analyst at ICICI Securities, points out that Wipro is seeing healthy traction in verticals such as BFSI, consumer and healthcare while manufacturing and energy and utility verticals are expected to improve in the coming quarters. “We believe the turnaround strategy of the new CEO [Delaporte] will help it in achieving industry leading growth in the longer run,” he says.

For the second quarter ending September, Wipro expects revenue from its IT services business to be in the range of $2.53 billion to $2.58 billion, translating into a quarter-on-quarter growth of 5% to 7%.

“The organic revenue growth could be in the range of 1.8%-3.8% quarter- on-quarter [in Q2]. Further, the company can clock about 14% organic growth in FY22 while the rest will be through acquisitions like Capco and Ampion,” Bhatt adds.

The positive results in Q1 are not just a quarter phenomenon, believe analysts. The steady pickup in outsourcing demand for large digital transformational deals is likely to boost earnings momentum for the tech majors through the rest of FY22 as well.