Q2 results: IT majors poised for gains on Infosys, Wipro guidance

Strong deal wins are likely to keep revenue growth elevated

Three IT majors have declared results for the second quarter (Q2) so far and the responses are mixed. Tata Consultancy Services (TCS) disappointed, missing revenue and profit estimates. Infosys and Wipro have beaten consensus, and both have provided optimistic guidance.

The market response has been clear. TCS is down roughly 7 per cent since it declared results last Friday. The Infosys and Wipro ADRs (American depositary receipts) are up – as are the rupee listings.

What does this imply for other IT stocks? There were fears that most IT companies would follow the TCS trend, and deliver disappointing performances. However, that now seems exaggerated. Most of the IT majors were winners on Tuesday. Analysts seem to believe that HCL Tech, Mindtree, L&T Infotech, L&T Tech, Coforge, etc., will deliver as well.   

A few salient points from these three results are worth noting. TCS has flagged a slowdown in Europe, but it is also seeing a strong pipeline of new deal wins. It has maintained margins sequentially, and even gained a little. It also has a relatively low attrition rate of 8.6 per cent. These are strengths.

Wipro recorded a sequential drop in bottom line due to lower margins and amortisation of the acquisition of Capco, a financial consultancy, in April for $1.45 billion. Wipro also handed out wage hikes to around 80 per cent of the workforce, which was a significant expense.

Revenue growth comfortably beat estimates in Q2, with a sequential constant currency rise of 8.1 per cent. Guidance indicated sequential growth of 2-4 per cent in revenues. The attrition rate was pretty high at 20 per cent, which is a big increase over 15 per cent in the last quarter. 

Infosys recently received a lot of negative publicity because of glitches in the new income tax portal, which took a long time to stabilise. However, the Q2 results were better than expected. Revenues and profits both beat estimates. The guidance was that revenue would rise between 16.5 per cent and 17.5 per cent in the current fiscal, which is an upgrade from its July guidance of 14-16 per cent growth. Margins dropped around 0.1 per cent. Infosys maintains its margin forecast for financial year 2021-22 (FY22) at 22-24 per cent. Infosys expects higher digital spends from corporates, which could lead to more deals like the mega-deals it already has with Daimler and Vanguard.

Like Wipro, Infosys has, however, seen a spike in attrition rates to around 20 per cent, from earlier levels of about 12-13 per cent. It also expects attrition to stay elevated for the next two quarters. As a result, it is assuming it will have to increase entry-level hiring plans to 45,000 from earlier estimates of 35,000.

Hence, results of these three big IT firms indicate European growth could be slow and attrition high. However, the industry as a whole could continue to do well with those caveats and the digital space may outperform.

The Nifty IT Index has underperformed in the last month, gaining 0.4 per cent while the Nifty went up 4.6 per cent. The correction in TCS isn’t deep enough to make the stock look attractive in terms of valuations. Infosys and Wipro could be technically poised for gains, and other IT companies, whose results are awaited, will not do badly.