Infosys to HCL Tech, IT firms to see strong Q3 despite seasonal quirks

Broad-based demand for digital, higher discretionary spends to help firms

The October-December (Q3) quarter is generally a low season for the Indian IT services industry due to furloughs in its majority markets — the US and Europe.

But the third quarter of FY22 will be an exception owing to broad-based secular demand for high digital transformation expenditure and a greater discretionary spend.

Though the increased cost of hiring, rising salaries, and lower working-days may affect margins, many analysts say a falling rupee in relation to the dollar can help.

Vikas Ahuja and Ashish Agarwal of Antique Stock broking in their report said: “We expect most of the companies to report margin expansion in 3Q largely on operational efficiency, strong top line growth and INR depreciation. In past quarters margins have been resilient despite wage hike, investments and large deal ramp-ups. In 3Q, we expect expansion in margins despite the impact of increased cost of hiring, furloughs and lower working days. We forecast 50-180 bps sequential expansion in margins for top four firms.”

In terms of top line performance, the street is expecting the main four players’ revenue to grow 2.5-6 per cent. With Infosys expected to up its annual revenue guidance, the street is expecting the company to lead the chart among the top-tier firms in organic growth.

“We expect Infosys to tighten the guidance band to 17-17.5 per cent from 16.5-17.5 per cent earlier. Note that Infosys started the year with revenue growth guidance of 12-14 per cent,” said Kawaljeet Singh and Sathishkumar S of Kotak Securities in their report.

Among the large players, HCL Technologies will witness growth in its products and platform business because this quarter is a good one for that area. The street will look for contracts signed during the quarter, rising attrition, and the pricing environment.

With large deals becoming fewer, which was evident in the Accenture results, and consulting revenue growing faster than outsourcing revenue, the street will watch for what the firms say on the demand outlook. “Large deals are fewer. Mega-deals closures are down to a trickle as clients shun large consolidation deals. The net result is a weak TCV (total contract value) number. A weak TCV number need not translate into weak revenue growth. The fact is that the market is buoyant with the high velocity of continuing transformation deals that will take a few years to achieve but broken down into smaller packets,” said the Kotak Securities report.

While many say attrition has peaked, the supply-side situation will be monitored closely.

“While skill-specific cost has increased in the market, we expect companies to try to right size their pyramids in order to offset the increase. Hiring across our IT coverage will continue to remain high as companies try to fulfil demand and backfill growing attrition, which will be a key focus area for investors. The resurgence of COVID-19 cases remains another risk on the supply-side,” said Mukul Garg and Raj Prakash Bhanushali of Motilal Oswal research in their report.