Strong deal pipeline may boost Q1 show of IT companies: Analysts

Margins will be a concern with salary hikes and attrition taking centre-stage

A seasonally-strong quarter, with no immediate impact of the second wa­ve and continued acceleration of digital transformation will allow the IT services sector to report a robust Q1 this fi­nancial year. However, key metrics to look out for will be attrition rate and margin lever as they will be impacted by salary hikes.

Analysts expect growth for the quarter to be broad-based, with sectors like banking, financial services and insurance (BFSI), retail, manufacturing, hi-tech and life sciences driving revenue growth.

Analysts across brokerage houses are pegging revenue growth in the range of 1.5 per cent to 4.5 per cent. Bengaluru-headquartered IT services firm Wipro will be an aberration as it is expected to clock in 9-9.4 per cent sequential growth due to the inclusion of Capco. Demand is also being driven by an increase in offshoring and vendor consolidation opportunities.

“Opening up of developed economies as vaccination progresses will lead to further spending recovery, especially in highly-impacted verticals such as travel and manufacturing. The strong demand is led by accelerated spending in digitalisation, cloud adoption and business transformation, among others. We believe these demand drivers will sustain for the next 2-3 years. Strong demand can lead to a healthy double-digit growth for Indian IT exports in FY22 and close to double digits in the subsequent years,” said Kawaljeet Saluja and Sathishkumar S of Kotak Institutional Equities in their report.

The recent quarter results of Accenture also hint towards a pick-up in demand for outsourcing work, which made the company also revise its revenue guidance upwards. It also raised its financial year 2021 (company follows January to Dece­mber calendar) growth guidance to 10-11 per cent. This is up from the 6.5 per cent and 8.5 per cent it had guided in the last quarter. New bookings for the quarter were at $15.4 billion and increased 39 per cent, with consulting bookings of $8 billion and outsourcing bookings of $7.4 billion.

The growth drivers are in place and key areas to look out for will be attrition, supply-side demands and how companies are able to handle it.

Analysts are expecting margins to be impacted as most tier I companies have announced second wage hikes. “A dip in margins is expected for most IT services companies, led by a second wage hike and an increase in attrition/hiring. They expect wage hikes to be in the 100-350 bps range for large/mid-cap IT companies. Motilal Oswal Financial Servi­ces (MOFSL) expects a 60 basis points (bps) aggregate sequential EBIT (earnings bef­ore interest and taxes) margin dip for large-cap IT players. The mid-cap universe sho­uld see a contraction of 110 bps,” said a Motilal Oswal report by Mukul Garg and Anmol Garg.

With demand looking good, and supply-side constraints continuing, analysts point out that key metrics to focus on will be attrition rates, margin levers and deal signing. Though the last quarter had seen a healthy pipeline of deals, this quarter has hardly seen any large pacts.