With the earnings season knocking on the door now, Information Technology (IT) firms are back in focus with renewed optimism around business growth. Analysts expect management commentaries to add to the positive outlook for the sector. “Recent commentary from both large- and mid-cap IT Services companies during their annual investor meets point to continued optimism on their calendar year 2021 growth outlook, even after adjusting for a low base YoY,” said brokerage and research firm Motilal Oswal in a note. The BSE IT index was up 1.6% on Monday as the TCS, Tech Mahindra, Infosys, and Wipro hit 52-week highs.
Analysts say that deal pipelines for IT firm across the board are strong. “The deal pipeline is strong across companies led by digital foundation deals, integrated deals from smaller clients, experience transformation and even core transformation deals,” said analysts at Kotak Securities. “Decisions on captive takeout/carve-outs, short-duration small programs and even mid-sized deals are progressing on expected lines,” they added.
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Winning large deals in the previous quarter would also result in aiding the growth momentum charted by IT firm so far this fiscal. TCS has won deals with Postbank and Pramerica while Infosys won Rolls Royce Daimler.
Motilal Oswal highlighted that the IT firms do not face any near term headwinds which could aid their performance. “Healthy order pipeline, large deal signings, strong earnings from Accenture, and absence of headwinds like a repeat of the COVID-19 led lockdown in 1QFY21 or uncertainty with regard to the outcome of the US Presidential election should drive the outperformance in 3Q v/s management guidance in 2QFY21,” they said.
Although the October-December quarter is a seasonally weak one, Kotak Securities believes this year will be different owing to strong momentum in digital spends, large deal wins, and lower than expected furloughs.
Revenue growth and outlook
Although leading IT firms have rolled out pay hikes or promotions, which might result in margin declines, EBIT margins are expected to increase on-year basis aided by lower travel costs and INR depreciation and relative lack of pricing pressure. Kotak Securities sees demand drivers for IT stocks to be three-fold. Firstly coming from the continuation of remote workplace which will lead to great emphasis placed on security, collaboration, scalability and automation. The second will be the growing importance of customer experience in the online world and lastly, the benefits of these changes are best utilized through core transformation.
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Tier-1 IT firm such as TCS, Infosys, Wipro, HCL Technologies, and Tech Mahindra are expected to record revenue growth of 3% on-quarter in USD terms, according to Motilal Oswal. EBIT margins for all, except Infosys, are expected to slip on-quarter basis. Net profit is expected to increase for all except Wipro. Among Tier-2 firms, USD revenue growth is again expected to be 3% while EBIT margins are expected to fall for all.