Q2 results: Digital fuels double-digit growth in IT services companies

The second-quarter performance of the Indian IT services players across the segment was strong with disciplined margin management. With a strong deal pipeline, analysts expect growth momentum in the industry to continue for the next two quarters.

Tier-I players managed to keep the sequential growth number (in US dollars) above 4.5 per cent with the majority of them delivering a strong performance in revenue.

Tier-II players too managed to grow faster and higher than street expectations, with growth being above 6.5 per cent on a constant currency basis (sequential).

“We believe that the IT sector has strong structural growth drivers in place to last for the next three-four years because once organisations modernise their core/migrate to cloud, they will be using even more technology (data analytics and AI) to fully leverage the benefits of cloud/digital core to differentiate themselves. Management commentaries indicate that demand is coming from all verticals and both digital leaders and laggards are accelerating their digital journeys,” said Aniket Pande and Aditi Patil of Prabhudas Lilladher in their post-results analysis report.

The note further added the gap between worldwide wide IT spending growth and Indian IT services growth had narrowed in CY20, but was expected to increase with higher growth in the Indian IT services in CY22-23 driven by higher offshoring.

Salil Parekh, chief executive officer and managing director, during the analysts call after the results, said: “We are participating more in areas relate to digital transformation, which relate to cloud work, which relate to data and analytics work. We see this across all industries.” Among the top tier players, Infosys and Wipro led the pack with strong organic growth at 5.7 per cent and 6.4 per cent, sequentially. Wipro’s growth was driven both by organic businesses and contribution from mergers and acquisitions, and inorganic contribution was at around 9 per cent of the revenue.

HCL Technologies, which was the only one to report strong growth in the total contract value, continued to see a decline in its product business.

TCS missed revenue expectations, though its India business was back with some big deal closures.

Suyog Kulkarni, senior research analyst, Reliance Securities, said the performance of TCS and HCL Technologies in Q3 and Q4 was disappointing.

“Growth will be strong due to the deal pipeline funnel signed. Though the majority have seen a contraction in large deal wins, the exception being HCL Tech, the overall deal momentum driven by cloud and digital transformation is intact.”

Q2 saw an impressive performance by mid-cap IT players, particularly Mindtree and Persistent. Persistent’s larger deal wins (more than $50 million) this quarter are impressive amid a small and mid-sized deal environment.

The other reason for the good performance of mid-cap players was the predominance of small and mid-sized deals. This is an area where mid-cap players have been active.

Tier-2 IT services companies grew at a higher rate (average 8.6 per cent QoQ in dollars) against Tier-1 companies (4.4 per cent QoQ dollars), led by deep domain competencies in specific verticals, enabling them to win large clients and a higher share of the digital portfolio.

The performance in Q2 was about margin management. Firms managed to hold on to margins despite higher sub-contracting, hikes, and promotions. Managements across the industry, however, say attrition should start to stabilise in the next two or three quarters.

Industry players have been hiring at their highest potential.